UNITED
STATES
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2008
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or
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[ ]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to .
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Commission File No.
0-30379
CHEMBIO DIAGNOSTICS,
INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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88-0425691
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3661
Horseblock Road, Medford, NY
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11763
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code (631)
924-1135
Securities registered pursuant to
Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered pursuant to section 12(g) of the Act:
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Common
Stock, $0.01 par value
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes __ No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [
]
Accelerated filer [
]
Non-accelerated
filer [
]
Smaller reporting company [X]
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No _X_
As of the
last business day of the Company’s most recently completed second fiscal
quarter, the aggregate market value of voting and non-voting common equity held
by non-affiliates* was $5,970,000.
As of
March 17, 2009, the registrant had 61,944,901 common shares
outstanding.
* Without
asserting that any of the issuer’s directors or executive officers, or the
entities that own 38,252,448 shares
of common stock are affiliates, the shares of which they are beneficial owners
have been deemed to be owned by affiliates solely for this
calculation.
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TABLE OF
CONTENTS
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Page
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PART
I
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ITEM
1.
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BUSINESS
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3
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ITEM
1A.
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RISK
FACTORS
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14
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ITEM
2.
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PROPERTIES
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19
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ITEM
3.
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LEGAL
PROCEEDINGS
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19
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PART
II
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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20
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ITEM
6.
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SELECTED
FINANCIAL DATA
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21
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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23
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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32
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
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32
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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32
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ITEM
9B.
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OTHER
INFORMATION
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33
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PART
III
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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34
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ITEM
11.
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EXECUTIVE
COMPENSATION
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36
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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40
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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42
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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44
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PART
IV
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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45
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SIGNATURES
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47
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PART
I
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ITEM
1.
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BUSINESS
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FORWARD-LOOKING
STATEMENTS
This report contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and Section 27A of the Securities Act of 1933. Any statements contained in
this report that are not statements of historical fact may be forward-looking
statements. When we use the words “intends,” “estimates,” “predicts,”
“potential,” “continues,” “anticipates,” “plans,” “expects,”
“believes,” “should,” “could,” “may,” “will” or the negative of these
terms or other comparable terminology, we are identifying forward-looking
statements. Forward-looking statements involve risks and uncertainties, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by forward-looking statements.
These factors include our research and development activities, distributor
channels, compliance with regulatory impositions; and our capital needs.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
Except
as may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not assume that
our silence over time means that actual events are bearing out as expressed or
implied in such forward-looking statements. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks, uncertainties and other factors that may affect
our business.
For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under “Part I, Item 1A,
Risk Factors.”
General
Chembio
Diagnostics, Inc. (referred to collectively with its subsidiaries as the
“Company”) and its subsidiaries develop, manufacture and market rapid diagnostic
tests that detect infectious diseases. The Company’s main products presently
commercially available are three rapid tests for the detection of HIV antibodies
in whole blood, serum and plasma samples, all of which employ lateral flow
technology, and two of which were approved by the FDA in 2006. In
addition, we have a fourth rapid HIV test, developed on our patented Dual Path
Platform (DPP®) technology, for the detection of antibodies to HIV in oral fluid
samples, as well as whole blood, serum and plasma samples. The products which
employ lateral flow technology are manufactured and sold under a
non-exclusive license we have from Inverness Medical Innovations, Inc.
(“Inverness”), which is also our exclusive marketing partner for the
FDA-approved products in the United States (as well as Europe and Asia for the
product that is known as the “barrel” format product) under its Clearview®
brand. Inverness launched its marketing of these products in the
United States in February 2007. Chembio’s two HIV STAT-PAK® rapid HIV
tests (in cassette and dipstick formats) are marketed outside the United States
through different partners and channels under our license from
Inverness.
On March
13, 2007, we were issued United States patent #7,189,522 for our Dual Path
Platform (DPP®) rapid test system. Additional patent protection for
DPP® is pending worldwide. DPP® enables Chembio to participate in the
growing point–of-care diagnostics market with a patent-protected point-of-care
platform technology. DPP® devices enable the development of
products whose performance we believe exceeds that of comparable tests developed
with lateral flow technology. As stated above we have completed
development of an oral fluid HIV test on this new platform and are currently
pursuing the commercialization of this product in several markets. We
have also developed and/or are developing several other products on DPP®. We
believe that DPP® provides significant advantages as a point-of-care platform
particularly where challenging sample matrices, such as oral fluid, are
involved, or where multiplexing is desired. We are developing all of
our new products using this platform. Our strategy for the
development of this platform technology is also dual; we have entered and are
seeking to enter exclusive collaborations with large marketing partners for whom
we will develop and manufacture products on the DPP® and we are developing our
own products that we may choose to market through selected distribution partners
either under a Chembio, DPP® or other brand.
Our
products are sold to medical laboratories and hospitals, governmental and public
health entities, non-governmental organizations, and medical professionals. Our
products are sold either under our DPP®, STAT-PAK® or SURE CHECK® registered
trademarks and/or the private labels of our marketing partners, such as is the
case with the Inverness Clearview® label for our rapid HIV tests in the United
States.
3
Rapid
HIV Tests
The major
component of our revenue growth in 2008 was increased sales of our rapid
HIV tests and related components. A large percentage of individuals
that are HIV positive worldwide are unaware of their status. Part of the reason
for this is that even those that do get tested in public health settings will
often not return or call back for their test results if samples have to be
sent out to a laboratory which can take at least several days to
process. The increased availability, greater efficacy and reduced
costs for anti-retroviral treatments (ARVs) for HIV is also having a tremendous
impact on the demand for testing, as the stigma associated with the disease is
lessened, and the ability to resume normal activities is substantially improved,
providing a positive message to those potentially infected. All
four of our rapid HIV tests are qualitative “yes/no” tests for the
detection of antibodies to HIV 1 & 2 with results available within
approximately 15 minutes. The tests differ principally only in the
method of sample collection and test procedure, flexibility with different
sample types, and cost of manufacture. Prior to our agreement with Inverness,
our rapid HIV tests had been marketed under either our SURE CHECK® or STAT-PAK®
trademarks. Pursuant to our agreement with Inverness Medical
Innovations, Inc., the SURE CHECK® product (which incorporates a proprietary
barrel format) is now being marketed by Inverness as Clearview®
Complete HIV 1/2 and the cassette format of our HIV 1/2 STAT-PAK (we also have a
third product known as HIV 1/2 STAT-PAK dipstick) is now being marketed by
Inverness in the United States as Clearview® HIV 1/2 STAT-PAK®. We
continue to market our STAT-PAK® cassette and dipstick outside the United States
through other marketing channels. In addition, in 2008 we amended the
agreement with Inverness, which previously had global exclusivity for the barrel
format product, to a non-exclusive in Africa and Latin
America. We will begin to market our DPP® oral fluid test
globally (including in the United States) as we establish required regulatory
clearances and authorizations, which we expect to receive during this year for
certain markets in the developing world, though there is no assurance that this
will occur.
Regulatory
Status:
Rapid
HIV Tests
The FDA
approved our Pre-Market Applications (hereinafter “PMA”; see “Governmental
Regulations” and Glossary) for our SURE CHECK HIV 1/2 (and also now Inverness’
Clearview® Complete HIV 1/2 ) and HIV 1/2 STAT-PAK (now Inverness’ Clearview®
HIV 1/2 STAT-PAK in the United States only) products on May 25,
2006. A Clinical Laboratory Improvement Act (“CLIA”) waiver was
granted by the FDA for the HIV 1/2 STAT-PAK on November 20,
2006. Labeling changes to the Inverness Clearview® brands for both
products were approved during the first quarter of 2007. CLIA
waiver for the Clearview® Complete HIV 1/2 was granted on October 22,
2007. CLIA waiver is required in order to market the products for use
in hospital emergency rooms, public health clinics and physicians’ offices,
where the level of training is traditionally less than the training at clinical
laboratories and laboratories in hospitals. These settings constitute
the largest portion of the available market for our products. Our third lateral
flow rapid HIV test, HIV 1/2 STAT-PAK Dipstick and our DPP® oral fluid
HIV test, though not FDA approved, qualify under FDA export regulations to
sell, subject to any required approval by the importing country, to customers
outside the United States. The dipstick product is our most competitively
priced version of our three rapid HIV tests, and was designed primarily for
resource-constrained, donor-funded markets that have large test volume
needs. Although we have received approval from a number of potential
importing countries for three of our lateral flow HIV tests, Brazil, Mexico,
Nigeria, Ethiopia and Uganda are the countries in which we have realized
significant sales. As a result of favorable evaluations of our HIV
1/2 STAT-PAK and HIV 1/2 STAT-PAK Dipstick products by the World Health
Organization (the “WHO”), these products are qualified for procurement
by programs funded by the United Nations and their partners’
programs. All three of our lateral flow HIV tests have qualified for
procurement under the President’s Emergency Plan for AIDS Relief
(“PEPFAR”). During the first quarter of 2009 we submitted our oral
fluid DPP® HIV 1/2 test, to these same agencies for inclusion in these
programs. We also have other evaluations ongoing for this new product
and anticipate commencement of clinical trials in the United States in support
of a PMA during this year.
Partners
Involved in Marketing Our Products
On
September 29, 2006 we executed marketing and license agreements with
Inverness. These agreements provide for the marketing of our
rapid HIV tests in the United States; the agreements also grant us a license
to Inverness’ lateral flow patents that may be applicable to certain of our
other products, including those that we had under development at the time of the
grant. As part of these agreements we also settled litigation that
had been ongoing with another company, StatSure Diagnostics, Inc., relating to
the proprietary barrel device that is incorporated into our Sure Check® HIV 1/2
product, which is also marketed exclusively as Inverness Clearview®
Complete HIV 1/2 in the United States, Europe and Asia.
4
We have
appointed distributors internationally so that we are positioned to service
those markets. Our focus is on those countries that have received or will
receive funding commitments for HIV prevention and treatment, of which rapid HIV
testing is an essential part. The most significant program
globally that funds HIV testing is the United States PEPFAR program, which
primarily is focused in 15 countries in sub-Saharan Africa that are at the
epicenter of the disease. During 2008 we shipped approximately
2.4 million test kits to Nigeria, 1.6 million test kits to Uganda, and
approximately 600,000 test kits to Ethiopia, or a total of approximately
4.6 million tests, mostly through the PEPFAR procurement agency known as the
Partnership for Supply Chain Management (“PSCM”). Lesser volumes were
shipped to several other countries in Asia, and Latin America. We also shipped
HIV test kit components to the Oswaldo Cruz Foundation for the manufacture of
tests in Brazil pursuant to our 2004 technology transfer agreement.
Effective
in January 2009, Nigeria changed from a parallel testing algorithm to a serial
algorithm, and in this change our test’s designation in two of their new
protocols was changed to that of a confirmatory test and a tie-breaker test in
the third protocol. This designation has resulted in a dramatic
reduction of sales to this country which decrease we anticipate will likely
continue for at least several months. During 2008, the implementation
of our HIV 1/2 STAT-PAK® as the confirmatory test in Ethiopia’s serial testing
algorithm resulted in significantly increased sales to that country, which
increases we anticipate may continue during 2009. We do not presently
anticipate however that the increased sales in Ethiopia will in any case fully
offset the decrease in Nigeria.
We are
pursuing new opportunities for distribution of our existing lateral flow HIV
tests and new DPP® oral fluid HIV test in a number of markets
globally. As stated earlier, during 2008 we amended our agreement
with Inverness so that we may now market the barrel product under Chembio’s
trademark, SURE CHECK® HIV 1/2 directly throughout South America and Africa,
subject to the payment of royalties to Inverness in accordance with our
license to their lateral flow patents.
OTHER
RAPID TESTS
We also
have commercially available lateral flow tests for Chagas Disease and also a
line of tests for the detection of tuberculosis in humans and certain animal
species. However, these products represented less than 4% of our product
revenues during 2008 and are not part of the central focus of our current
business and growth strategy.
Our
Rapid Test Technologies
All of
our commercially available current products employ either in-licensed lateral
flow technology or our own patented Dual Path Platform (DPP®)
technology.
Lateral
flow technology involves a sample flowing from the point of application on a
test strip to provide a test result, indicated with a labeling reagent that
allows the result to be visually or otherwise detected, on a portion of a strip
downstream from either the point of application of the
sample. Lateral flow technology is well established and widely
applied in the development of rapid diagnostic tests. The
functionality of our lateral flow tests is based on the ability of an antibody
to bind with a specific antigen (or vice versa) and for the binding to become
visible through the use of the colloidal gold and/or colored latex that we use
in our products. The colloidal gold or the colored latex produces a
colored line if the binding has occurred (the test line), in which case it means
there has been a reactive or positive result. In any case, a separate
line (the control line) will appear to confirm that the test has been validly
run in accordance with the instructions for use.
On March
13, 2007, we were issued United States patent number #7,189,522 describing a
Dual Path Immunoassay system which we believe provides several advantages over
lateral flow technology for certain applications (See “Intellectual
Property”). The Dual Path Platform technology, or DPP®, uniquely
provides for the sample application and migration toward the test zone area to
be from an independent strip. This system enables improved sample
control, multiplexing and certain other advantages. DPP® is providing
the Company with significant new product development and licensing
opportunities, and we are devoting all of our research and development
efforts toward these programs.
The
sensitivity of a test indicates how strong the sample must be before it can be
detected by the test. The specificity of a test measures the ability
of the test to analyze, isolate, and detect only the matters targeted by
the test. The sensitivity and specificity of our rapid HIV tests
during our clinical trials undertaken in connection with our FDA PMAs were 99.7%
and 99.9%, respectively. Both lateral flow technology and DPP® allow the
development of accurate, low cost, easy-to-perform, single-use diagnostic tests
for rapid, visual detection of specific antigen-antibody complexes on a test
strip. This format provides a test that is simple (requires neither
electricity nor expensive equipment for test execution or reading, nor skilled
personnel for test interpretation), rapid (turnaround time approximately 15
minutes), safe (minimizes handling of potentially infected specimens),
non-invasive (requires 5-20 micro liters of whole blood easily obtained with a
finger prick, or alternatively, serum or plasma), stable (24 months at room
temperature storage in the case of our HIV tests), and highly
reproducible.
5
Our HIV
tests are qualitative (reactive/non-reactive) tests. We have developed
proprietary techniques that enable us to achieve high levels of sensitivity and
specificity [see definition above] in our diagnostic tests using our proprietary
colloidal gold conjugates and buffer systems. These techniques
include the methods we employ in manufacturing and fusing the reagents with the
colored latex, or colloidal gold, blocking procedures used to reduce false
positives, and methods used in treating the materials used in our tests to
obtain maximum stability and resulting longer shelf life. We also
have extensive experience with a variety of lateral flow devices, including the
sample collection device used in our SURE CHECK rapid HIV test which eliminates
the need for transferring finger-stick whole blood samples from the fingertip
onto a test device, because the collection of the sample is performed within a
tubular test chamber that contains the lateral flow test strip. The
whole blood sample is absorbed directly onto the test strip through a small
opening in one end of the test chamber and an absorbent pad positioned just
inside this same end of the test chamber.
During
2007 and 2008 we entered collaborations with companies that have developed hand
held and desktop readers that can objectively measure, quantify, record and
report test results. Certain of the products we have and/or are developing for
our customer in Brazil, the Oswaldo Cruz Foundation, will incorporate some of
these readers, and we are developing other products that may be used with or
will require use of a reader.
Target
Market
Rapid
HIV Tests
The
marketing of our FDA-approved and CLIA-waived rapid HIV tests in the United
States was launched by Inverness during the first quarter of 2007, and we
estimate to have approximately a 10% share of the U.S. rapid HIV test
market. In the United States, the need for rapid HIV tests has been
developing first in the public health and hospital emergency room segments, and
also in the physicians’ office laboratories. Of the estimated
25-30 million HIV tests performed in clinical settings in the United
States, rapid HIV tests now account for approximately 20-25% of this
market, or approximately 5-6 million tests of this total. We believe
that the total number of HIV tests will continue to grow, and that the share
available to rapid HIV tests will also grow.
The pace
of the implementation of recommendations that were made in late 2006
by the United States Centers for Disease Control
(“CDC”) for routine HIV testing of all individuals between the ages
of 13 and 64 will be a major factor in the rate of growth of the rapid HIV
testing market in the United States. Endorsement of these recommendations
by opinion leaders in the professional medical community are gradually helping
to increase the demand for HIV testing in the United States. In
addition, the revelation in a study disclosed in 2008 by CDC that annual new HIV
cases in the US, which disproportionately impact African-Americans, had been
under-reported for years by approximately 40%, underscored the need for improved
prevention efforts in the United States. Although the most recent efforts to
increase federal funding for STD prevention in the federal stimulus package were
unsuccessful, we still believe that there is a good prospect that the current
Congress and Administration will seek to increase these programs through other
legislative appropriations.
In the
international market, PEPFAR, the large United States funded international AIDS
relief program focused on fifteen countries, was reauthorized last year for up
to $48 billion for FY2009-2012 (up from $15 billion in 2004-2008); the
appropriation for 2009 is approximately $5.5 billion, of which approximately 12%
or $900 million is allocated to the Global Fund, the other large international
program created in 2001 to combat HIV/AIDS, TB and Malaria. PEPFAR,
The Global Fund and other global initiatives have succeeded in making
life-saving treatments available now to well in excess of one million
individuals. We believe that this is likely to have the effect of
further encouraging more people to get tested, because with the availability of
treatment, there is a clear reason to be tested. Other programs such
as UNAIDS are significant participants in the global effort to prevent further
transmission and save the lives of those already infected, as well as care for
their families that are impacted.
Marketing
Strategy
Our
marketing strategy is to:
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Support,
review and assess the marketing and distribution efforts of our rapid HIV
tests by Inverness Medical Innovations, Inc. Inverness, which
is a leading marketer of point-of-care diagnostic products, has
significantly expanded its distribution footprint since we signed our
agreement with Inverness, and we believe that this will enhance
opportunities for Inverness to market our rapid HIV tests. In particular,
Inverness has been very active in acquiring point-of-care product lines
serving hospital emergency rooms and physicians’
offices.
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·
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Leverage
our DPP® intellectual property and regulated product development and
manufacturing experience to create new collaborations where Chembio can be
the exclusive development and manufacturing partner with world class
marketing partners.
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·
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Develop
a small number of Chembio or DPP® branded products that capitalize on the
advantages of this newly patented point-of-care technology and select
distribution partners for such
products.
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6
Competition
The
diagnostics industry is a multi-billion dollar international industry and is
intensely competitive. Many of our competitors are substantially
larger and have greater financial, research, manufacturing and marketing
resources.
Industry
competition in general is based on the following:
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Scientific
and technological capability;
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·
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Proprietary
know-how;
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·
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The
ability to develop and market products and
processes;
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·
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The
ability to obtain FDA or other required regulatory
approvals;
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·
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The
ability to manufacture products that meet applicable FDA requirements,
(i.e. FDA’s Quality System Regulations) (see Governmental Regulation
section);
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·
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The
ability to manufacture products
cost-effectively;
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·
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Access
to adequate capital;
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·
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The
ability to attract and retain qualified personnel;
and
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·
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The
availability of patent protection.
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We
believe our scientific and technological capabilities and our proprietary
know-how relating to our in-licensed lateral flow technology rapid tests
and to our proprietary know-how related to our patented dual path platform
technology, particularly for the development and manufacture of tests for
the detection of antibodies to infectious diseases such as HIV, are very
strong.
Our
ability to develop and market other products is in large measure dependent on
our having additional resources and/or collaborative
relationships. Some of our product development efforts have been
funded on a project or milestone basis. We believe that our
proprietary know-how in lateral flow technology and in our dual path platform
technology has been instrumental in our obtaining the collaborations we have and
that we continue to pursue. We believe that the patent protection
that we have with our Dual Path Platform enhances our ability to develop more
profitable collaborative relationships and to license out the
technology.
We
believe our regulatory certifications are also a strong asset for developing new
products and collaborations. There are only two companies besides Chembio that
have approved PMA’s for lateral flow rapid tests, all HIV tests: Trinity Biotech
(Ireland) and Orasure Technologies, Inc. (PA). We believe that this
is a significant competitive advantage when considering new products and
collaborations. During 2006 and 2007 we obtained CLIA waivers
for each of our FDA PMA approved HIV tests. These products
therefore represent two of the four CLIA-waived rapid HIV
tests. During 2007 and 2008 we received facility and product licenses
from the USDA, became certified under ISO 13.485, and received our initial CE
mark (for our Chagas product). We anticipate receiving CE marks for our HIV
products during the first half of 2009.
Our
access to capital is much less than that of several of our competitors,
and to the extent we would need to access large amounts of capital, this is
a competitive disadvantage. We believe however that our access to
capital is likely to increase if we continue our trend of improved operating
results, and in the meantime we are focused on minimizing our capital
requirements. Establishment of strategic collaborations for our DPP®
technology also may provide us with access to funding that is potentially less
dilutive or non-dilutive. The simplification of our capital
structure that was completed in December 2007 should also improve our access to
capital (See Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Overview).
To date,
we believe we have been competitive in the industry in attracting and retaining
qualified personnel. Because of the greater financial resources of
many of our competitors, we may not be able to compete effectively for the same
individuals to the extent that a competitor uses its substantial resources to
attract any such individuals. Also, in order to control costs and
conserve resources, we have implemented layoffs and salary reductions that
larger companies with greater resources may not need to implement.
7
We have
been able to obtain patent protection by entering into licensing arrangements
for reagents and lateral flow technologies. The March 2007 issuance by the
United States Patent & Trademark Office of our Dual Path Platform™ patent
gives us our first patent protection for our own rapid test platform, which we
believe enhances our competitive position. Additional
protection of this intellectual property is pending worldwide.
Competitive
factors specifically related to our HIV tests are product quality, delivery,
sensitivity, specificity, ease-of-use, shelf life and price. Other
factors can be sample size required, the presence of a true IgG control, and
time to result. During the last few years, the competitive features
of certain products produced by some international competitors have
improved. Most of these companies, whose products are not and in
most cases probably could not be FDA approved, typically have substantially
lower costs of labor, regulatory approval and compliance, and intellectual
property (if any) as compared with Chembio. Price has become an increasingly
important factor since U.S. procurement rules still operate under a waiver
of Buy America provisions, described below. Also, as described below,
in most of the donor-funded markets in the developing world technical committees
controlled by host governments are empowered to make final decisions as to which
products will be used in screening programs. The leading
competitors in the international rapid HIV test market are Trinity Biotech
(Ireland), Inverness (U.S.) and Standard Diagnostics
(Korea). Uni-Gold® HIV, marketed by Trinity Biotech of Ireland and
Determine®, marketed by Inverness Medical, are the market leaders in the
developing world, particularly sub-Saharan Africa, which is where most of the
funding for rapid HIV tests is being allocated from donor funded programs such
as PEPFAR. Neither the Trinity or Inverness products are
FDA-approved, although Trinity does manufacture in Ireland an FDA-approved rapid
HIV test, Uni-Gold Recombigen, for marketing in the United States. Inverness’
Orgenics subsidiary in Israel also has a rapid HIV test, Double-Check
Gold, as does its subsidiary in China, ABON; neither of these products
is FDA-approved. As such, while Inverness is our exclusive marketing
partner in the United States, it is also a principal competitor to our rapid HIV
tests outside the United States. Furthermore, in 2006 Trinity Biotech
settled litigation with Inverness, and as part of that settlement it committed
to have ABON, an Inverness subsidiary, to manufacture all of Trinity’s
Uni-Gold® HIV products primarily for the African
market. Standard Diagnostics of Korea also has a low-cost
product that is very competitive against each of the other competitors in the
developing world. There are a number of additional competitors,
including several based in China and India of varying quality, that produce
competitive rapid HIV tests.
Under
a now long-established waiver of Buy America provisions, products procured
with US taxpayer funds need not be FDA approved or even made in the US so long
as they meet reduced quality standards as compared to what would be required for
an FDA approved product. Under the waiver guidelines, all manufacturers are
invited by PEPFAR to be considered for procurement with United States taxpayer
funds. The waiver, which was initially made available because of a dearth of
suitable US-made or FDA approved products when PEPFAR was originally
authorized, has continued even though there are now several products, including
Chembio’s, that are FDA approved. Also, in addition to competing against
approximately thirty non-FDA approved, non-US made products that can be
purchased under U.S. procurement rules, in order to realize sales in the
markets where the donor (mostly U.S.) funds are allocated, the product must
additionally be selected by a country’s ministry of health or their designees to
be part of a national testing protocol or “algorithm”. The algorithms
typically use multiple rapid tests in sequence or in parallel to screen and
confirm patients at the point-of-care and are increasingly allowing for multiple
tests to be qualified in these algorithms. Chembio’s sales in Africa
and certain other markets are therefore based on the fact that its test has been
one of those selected. A product’s designation in a donor-funded
country’s algorithm is largely followed by most of the implementing agencies and
organizations, resulting in the selection process being critical to
participation in donor funded procurements in such market, and limiting the
impact of marketing activities once these selections have been made. The
selection process in each of these countries is not predictable and is based
upon a number of factors, including but not limited to product performance,
price, and supply chain.
In the
developed world, particularly the United States and Europe, the competitive
landscape and market dynamics are quite different. Due to the costs
of and quality system requirements associated with US FDA regulatory approval,
there are currently only two companies besides Chembio that have products that
are both FDA PMA-approved and also CLIA-waived: Orasure Technologies (Bethlehem,
PA) with OraQuick®, and Trinity Biotech Ltd. (Ireland) with
Uni-Gold® Recombigen. The regulatory costs for FDA approval and fewer
number of products in turn results in very different (higher) pricing in the US
market as compared with the developing world, with prices in the US averaging
$8-12 per test to end user. This compares to approximately $1.00
per test in the developing world. As the requirements for the PMA and
CLIA waiver are difficult, costly, risky and time-consuming, particularly
relative to the size of the market, and because such approval is not required
for participation in PEPFAR under the above-described waiver guidelines, we
do not anticipate that Inverness has any plan to submit any of its products
produced outside the U.S. to the FDA. Further, our agreements
with Inverness provide that in the event one of those submissions is
made (or if Inverness acquires a competitive product in the United States),
we have the right to terminate our agreement with Inverness or make Inverness’
marketing rights non-exclusive. In either case, we would retain a
license under the Inverness lateral flow patents to market the products under a
Chembio brand and/or through third party distribution partners.
8
Orasure
has an estimated market share in the U.S. of approximately 70% with its Oraquick
® product. This product’s main advantages are that it was the
first test to market and also that, at least for certain market segments
(primarily public health), it can be performed with oral fluid samples, as
compared with only blood samples, which is the case for our products as well as
Trinity’s. The main disadvantage of the Orasure product is its
relatively higher price. Also, Orasure’s claimed sensitivity with oral fluid
samples is lower than with blood samples, and combined with some limited reports
of performance (false positive) problems on oral fluid samples, this has created
some opportunities for Inverness with our product, as well as for
Trinity.
Orasure
markets its products directly through its own sales organization to the public
health market, has made a significant investment in that market, and has nearly
100% of the three largest states in this market (New York, California and
Florida) that together constitute the majority of public health HIV testing in
the US. For the hospital market segment Orasure had an exclusive
marketing arrangement with Abbott Diagnostics, but as of January 2009 they
terminated this agreement and are expanding their direct sales organization to
market directly to the hospital market segment as well. Trinity also
relies on its own sales force to market its product, and does not have any other
rapid tests to sell to distributors. The Uni-Gold product that is marketed by
Trinity accounts for an estimated 10% of the market. This product
does not detect HIV-2, while our products and Orasure’s both do. Though HIV-2 is
a rare strain of HIV, it is an advantage to be able to detect, though there is a
cost of 15% of Net Sales to the license for this claim. Trinity’s
product also requires a much larger sample size, and does not have a true IgG
control. This means that a control line, which is intended to confirm
that the test procedure has been performed correctly, will appear on their
product so long as any liquid material is applied to its sampling area;
Chembio’s (and Orasure’s) control line will appear only if a biological sample
is applied. The shelf life of our HIV products is 24 months, which is
twice that of both the Uni-Gold and Orasure products.
We
believe that Inverness, as a leading marketer of a broad range
of point-of-care tests sold into all U.S. market segments, has a
superior marketing organization as compared to either of our U.S. market
competitors who are much smaller than Inverness. Inverness has made a
significant investment in its launch of our products, in the training of a large
marketing organization in the US, and in the acquisition of complementary
product lines and sales organizations. For example, Inverness has
significantly augmented its access to emergency room departments in hospitals
through its acquisition of Bio-Site, which was the leading company in
point-of-care tests for cardiac monitoring, and whose sales force can now
add our product to its product portfolio for this important market
segment. We believe that this is an example of the distribution
advantages of our marketing partner.
Chembio’s
HIV Tests
One of
our two product formats, the “barrel” format now marketed by Inverness as
Clearview® Complete HIV 1-2, is a unique product format inasmuch as it is a
unitized product, meaning that all components necessary to perform a single test
are contained in a single pouch. This “barrel” format provides for a
proprietary method of collecting finger-stick whole blood samples that
eliminates the need for the step that all other devices require of transferring
the sample from the fingertip to the sample well of the test. Also,
the buffer solution in the barrel format is in a unitized vial that is
pierced by the barrel tip to initiate the sample migration up the test strip
contained inside the “barrel”, and thereby creates a closed system that helps to
minimize possible exposure to potentially infectious samples.
Our other
FDA PMA approved rapid HIV test, marketed by Inverness as Clearview® HIV 1-2
STAT PAK®, is a rectangular-shaped lateral flow plastic cassette format test
wherein the sample is transferred from the sample source (finger tip in the
case of finger-stick whole blood samples) to the sample port in the
cassette by means of a transfer loop. Though this step is not
required in the barrel format, the cassette is less costly to manufacture, is a
more familiar format to customers that have performed other standard
design lateral flow tests, and is a more flexible format that utilizes the same
procedure for all approved sample matrices (venous whole blood, finger-stick
whole blood, serum and plasma). To date this format has accounted for almost all
of the sales we have had through Inverness. However this is in part
due to the fact that the barrel format was not CLIA waived until October 2007,
approximately a year later than the cassette product, and we anticipate more
sales of this product in the future, though still less than the
cassette.
Research
and Development
During
2008 and 2007, $2.6 million and $1.9 million, respectively, were spent on
research and development activities. Substantially all of our new
product development activities involve employment of our Dual Path Platform
(DPP®) technology for which we were awarded a U.S patent in 2007. We
believe that this platform enables us to pursue many new product development and
licensing opportunities. The DPP® technology can provide improved features on
certain tests developed with it that include higher sensitivity, earlier
detection, improved performance with more challenging sample types (such as oral
fluid), and the improved ability to detect multiple analytes (multiplexing) in
one test device.
During
2008 we made substantial progress in developing a portfolio of products based on
the DPP® technology. These activities include completing development
of certain products and making significant progress toward the development of
additional products. These activities are further explained in Part
II Item 7.
9
Regulatory
Activities
We
continue to make progress on obtaining a Community European (CE) marking for our
products to indicate conformity with European Union health, safety and
environmental requirements. We have submitted the HIV 1/2 STAT-PAK® technical
file to our notified body and should complete all required steps for CE Marking
of this product during the second quarter of 2009. Under
our agreement with Inverness we are to obtain a CE Marking for the Clearview®
Complete HIV 1/2. We are prepared to submit the technical file for
this product on behalf of Inverness once we received final proposed labeling
from Inverness.
We are
also pursuing registrations of our lateral flow and DPP® HIV products in a
number of other jurisdictions, and also pursing registrations with the USDA of
additional claims for our veterinary tuberculosis products.
During
2008 we received FDA approval for the lowering of the age limits that the tests
are approved for from 18 years to 13 years of age. This lowering of
the lower age limit put our approved product claims in line with the 2006 CDC
recommendations for routine test of all individuals between the ages of 13 and
64, and we believe that this additional marketing claim for the product will
assist Inverness in certain market opportunities with our products.
Employees
At
December 31, 2008, we employed 114 people, including 110 full-time
employees. Effective May 2006, we entered into an employment
agreement with Lawrence Siebert, President and Chairman. Effective
March 2007, we entered into an employment agreement with Javan Esfandiari,
Executive Vice-President of Research and Development.
Governmental
Regulation
The
manufacturing and marketing of the Company’s existing and proposed diagnostic
products are regulated by the United States Food and Drug Administration
(“FDA”), United States Department of Agriculture (“USDA”), certain state and
local agencies, and/or comparable regulatory bodies in other
countries. These regulations govern almost all aspects of
development, production and marketing, including product testing, authorizations
to market, labeling, promotion, manufacturing and record
keeping. The Company’s FDA and USDA regulated products require some
form of action by each agency before they can be marketed in the United States,
and, after approval or clearance, the Company must continue to comply with other
FDA requirements applicable to marketed products, e.g. Quality Systems (for
medical devices). Failure to comply with the FDA’s requirements can
lead to significant penalties, both before and after approval or
clearance.
Most
point-of-care diagnostic products are regulated as medical devices by the
FDA Centers of Device and Radiological Health, though some are regulated by the
FDA Center of Biologics Evaluation and Research. There are two review
procedures by which medical devices can receive FDA clearance or
approval. Some products may qualify for clearance under Section
510(k) of the Federal Food, Drug and Cosmetic Act, in which the manufacturer
provides a pre-market notification that it intends to begin marketing the
product, and shows that the product is substantially equivalent to another
legally marketed product (i.e., that it has the same intended use and is as safe
and effective as a legally marketed device and does not raise different
questions of safety and effectiveness). In some cases, the submission
must include data from human clinical studies. Marketing may commence
when the FDA issues a clearance letter finding such substantial
equivalence. An applicant must submit a 510(k) application at least
90 days before marketing of the affected product commences. Although
FDA clearance may be granted within that 90-day period, in some cases as much as
a year or more may be required before clearance is obtained, if at
all.
If the
medical device does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is
required by statute and the FDA’s implementing regulations to have an approved
application), the FDA must approve PMA application before marketing can
begin. PMA’s must demonstrate, among other matters, that the medical
device provides a reasonable assurance of safety and effectiveness. A
PMA application is typically a complex submission, including the results of
non-clinical and clinical studies. Preparing a PMA application is a
much more expensive, detailed and time-consuming process as compared with a
510(K) pre-market notification. Once a PMA has been submitted, the
FDA is required to review the submission within a statutory period of
time. However, the FDA’s review may be, and often is, much longer,
often requiring one year or more, and may include requests for additional
data. The Company has approved PMAs for the two rapid HIV tests now
marketed by Inverness Medical as Clearview® Complete HIV 1-2 and Clearview® HIV
1-2 STAT PAK®.
10
Every
company that manufactures medical devices distributed in the United States must
comply with the FDA’s Quality System Regulations. These regulations
govern the manufacturing process, including design, manufacture, testing,
release, packaging, distribution, documentation and
purchasing. Compliance with the Quality System Regulations is
required before the FDA will approve an application, and these requirements also
apply to marketed products. Companies are also subject to other
post-market and general requirements, including compliance with restrictions
imposed on marketed products, compliance with promotional standards, record
keeping and reporting of certain adverse reactions or events. The FDA
regularly inspects companies to determine compliance with the Quality System
Regulations and other post-approval requirements. Failure to comply
with statutory requirements and the FDA’s regulations can lead to substantial
penalties, including monetary penalties, injunctions, product recalls, seizure
of products, and criminal prosecution.
The
Clinical Laboratory Improvement Act of 1988 (“CLIA”) prohibits laboratories from
performing in vitro tests for the purpose of providing information for the
diagnosis, prevention or treatment of any disease or impairment of, or the
assessment of, the health of human beings unless there is in effect for such
laboratories a certificate issued by the United States Department of Health and
Human Services (via the FDA) applicable to the category of examination or
procedure performed. Although a certificate is not required for the
Company, it considers the applicability of the requirements of CLIA in the
design and development of its products. The statutory definition of
“laboratory” is very broad, and many of our customers are considered
labs. A CLIA waiver will remove certain quality control and other
requirements that must be met for certain customers to use the Company’s
products and this is in fact critical to the marketability of a product into the
point-of-care diagnostics market. The Company has received a
CLIA waiver for each of the two rapid HIV tests now marketed by Inverness
Medical as Clearview® Complete HIV 1/2 and Clearview® HIV 1/2 STAT
PAK®. The CLIA waiver was granted by the FDA for HIV 1/2 STAT-PAK on
November 20, 2006 and for the Clearview® Complete HIV 1/2 on October 22,
2007.
In
addition, the FDA regulates the export of medical devices that have not been
approved for marketing in the United States. The Federal Food, Drug
and Cosmetic Act contains general requirements for any medical device that may
not be sold in the United States and is intended for
export. Specifically, a medical device intended for export is not
deemed to be adulterated or misbranded if the product: (1) complies with the
specifications of the foreign purchaser; (2) is not in conflict with the laws of
the country to which it is intended for export; (3) is prominently labeled on
the outside of the shipping package that it is intended for export; and (4) is
not sold or offered for sale in the United States. Some medical
devices face additional statutory requirements before they can be
exported. If an unapproved device does not comply with an applicable
performance standard or PMA requirement, is exempt from either such requirement
because it is an investigational device, or is a banned device, the device may
be deemed to be adulterated or misbranded unless the FDA has determined that
exportation of the device is not contrary to the public health and safety and
has the approval of the country to which it is intended for
export. However, the Federal Food, Drug and Cosmetic Act does permit
the export of devices to any country in the world, if the device complies with
the laws of the importing country and has valid marketing authorization in one
of several “listed” countries under the theory that these listed countries have
sophisticated mechanisms for the review of medical devices for safety and
effectiveness.
The
Company is also subject to regulations in foreign countries governing products,
human clinical trials and marketing, and may need to obtain approval or
evaluations by international public health agencies, such as the World Health
Organization, in order to sell diagnostic products in certain
countries. Approval processes vary from country to country, and the
length of time required for approval or to obtain other clearances may in some
cases be longer than that required for United States governmental approvals. On
the other hand, the fact that our HIV diagnostic tests are of value in the AIDS
epidemic may lead to some government process being expedited. The
extent of potentially adverse governmental regulation affecting Chembio that
might arise from future legislative or administrative action cannot be
predicted.
One or
more of the Company’s rapid HIV tests are also approved or pending approval for
marketing in several foreign jurisdictions, including but not limited to Brazil,
Mexico, and India, as well as a number of other nations in the developing
world.
Environmental
Laws
To date,
we have not encountered any costs relating to compliance with any environmental
laws.
Intellectual
Property
Intellectual
Property Strategy
Our
intellectual property strategy is to: (1) build our owned
intellectual property portfolio around our Dual Path Platform technology; (2)
pursue licenses, trade secrets and know-how within the area of lateral flow
technology and DPP®; and (3) develop and acquire proprietary positions to
reagents and new hardware platforms for the development and manufacture of rapid
diagnostic tests.
11
Trade
Secrets and Know-How
We
believe that we have developed a substantial body of trade secrets and know-how
relating to the development of lateral flow and DPP® based diagnostic tests,
including but not limited to the sourcing and optimization of materials for such
tests, and how to maximize sensitivity, speed-to-result, specificity, stability
and reproducibility. The Company possesses proprietary know-how to develop
tests for multiple conditions using colored latex. Our buffer
formulations enable extremely long shelf lives of our rapid HIV tests and we
believe that this provides us with an important competitive
advantage.
Lateral
Flow Technology and Reagent Licenses
As part
of our agreements in 2006 with Inverness for the marketing of our HIV tests, we
were granted non-exclusive licenses to their lateral flow technology for certain
products manufactured and marketed by Chembio including but not limited to our
HIV tests. Although we believe our DPP® is outside of the scope of lateral
flow patents, we consult with patent counsel, and seek licenses and/or redesigns
of products that we believe to be in the best interests of the Company and our
stockholders. Because of the costs and other negative consequences of
time-consuming patent litigation, we often attempt to obtain a license on
reasonable terms. Nevertheless there is no assurance that Inverness’
lateral flow patents will not be challenged or that other patents containing
claims relevant to the Company’s products will be not be granted and that
licenses to such patents, if any, will be available on reasonable terms, if
any. Inverness has aggressively enforced its lateral flow intellectual
property, and in 2008 brought a patent infringement lawsuit against
Orasure. Orasure has claimed that their Oraquick product does not
infringe the Inverness patent and that the Inverness patent is
invalid. The lawsuit is in the discovery phase.
In the
event that it is determined that a license to any patent is required and it
is not possible to negotiate a license agreement under a necessary patent, we
may be able to modify the applicable product such that a license would not be
necessary. However, this alternative could delay or limit our ability to sell
these products in the United States and/or other markets, and/or increase
penalties, all of which would adversely affect our results of operations, cash
flows and business.
The DPP®
technology provides us with our own intellectual property and we believe it
also enables tests to be developed with improved sensitivity as compared
with comparable tests on lateral flow platforms. The Company has
signed and anticipates signing new development projects based upon the DPP®
technology that will provide new manufacturing and marketing
opportunities. We have several other patents issued or pending
related to other point-of-care technologies or applications
thereof. The DPP® patent protection is being prosecuted in many
foreign jurisdictions as well.
The
peptides used in our rapid HIV tests are patented by Adaltis Inc. and are
licensed to us under a 10-year non-exclusive license agreement dated August 30,
2002, which was recently amended to reduce the royalty rate. We
also have licensed the antigens used in other tests including our
Chagas, Tuberculosis and Leishmaniasis tests. In prior years we
concluded license agreements related to intellectual property rights owned
by the United States associated with HIV- 1, and during the first quarter
of 2008 we entered into a sub-license agreement for HIV-2 with Bio-Rad
Laboratories N.A., the exclusive licensee of the Pasteur Institute’s HIV-2
intellectual property estate.
Corporate
History
On May 5,
2004, we completed a merger with Chembio Diagnostic Systems Inc. through which
Chembio Diagnostics Systems Inc. became our wholly-owned subsidiary, and through
which the management and business of Chembio Diagnostic Systems Inc. became our
management and business. As part of this transaction, we changed our
name to Chembio Diagnostics, Inc. In 2003, we had sold our prior
business, and as a result, we had no specific business immediately prior to the
merger.
Since the
formation of Chembio Diagnostic Systems Inc. in 1985, it has been involved in
developing, manufacturing, selling and distributing in-vitro diagnostic tests,
including rapid tests beginning in 1995, for a number of conditions in humans
and animals.
On March
12, 2004, we implemented a 1-for-17 reverse split of our common
stock. All references in this Form 10-K to shares of our common stock
have been adjusted to reflect this reverse split.
12
Glossary
|
AIDS
|
Acquired
Immunodeficiency Syndrome. AIDS is caused by the Human
Immunodeficiency Virus, HIV.
|
|
ALGORITHM
(parallel or serial)
|
For
rapid HIV testing this refers both to method or protocol (in developing
countries to date) for using rapid tests from different manufacturers in
combination to screen and confirm patients at the point-of-care, and may
also refer to the specific tests that have been selected by an agency or
ministry of health to be used in this way. A parallel algorithm
uses two screening tests from different manufacturers and a tie-breaker
test only if there is a discrepancy between the screening tests results. A
serial algorithm only uses a second confirmatory test if there is a
positive result from the screening test, meaning that the number of
confirmatory tests used is equal to the positivity rate in the testing
venue. A tie-breaker test resolves discrepancies between the screen and
the confirmatory test.
|
|
ANTIBODY
|
A
protein which is a natural part of the human immune system produced by
specialized cells to neutralize antigens, including viruses and bacteria
that invade the body. Each antibody producing cell manufactures
a unique antibody that is directed against, binds to and eliminates one,
and only one, specific type of antigen.
|
|
ANTIGEN
|
Any
substance which, upon entering the body, stimulates the immune system
leading to the formation of antibodies. Among the more common antigens are
bacteria, pollens, toxins, and viruses.
|
|
ARVs
|
Anti-Retroviral
Treatments for AIDS
|
|
CD-4
|
The
CD4+ T-lymphocyte is the primary target for HIV infection because of the
affinity of the virus for the CD4 surface marker. Measures of
CD4+ T-lymphocytes are used to guide clinical and therapeutic management
of HIV-infected persons.
|
|
CDC
|
United
States Centers for Disease Control and Prevention
|
|
CLIA
waiver
|
Clinical
Laboratory Improvement Act designation that allows simple tests to be
performed in point-of-care settings such as doctors offices, walk-in
clinics and emergency rooms.
|
|
DIAGNOSTIC
|
Pertaining
to the determination of the nature or cause of a disease or
condition. Also refers to reagents or procedures used in
diagnosis to measure proteins in a clinical sample.
|
|
EITF
|
Emerging
Issues Task Force
|
|
FASB
|
Financial
Accounting Standards Board
|
|
FDA
|
United
States Food and Drug Administration
|
|
FDIC
|
Federal
Deposit Insurance Corporation
|
| FAS | Financial Accounting Standard |
|
HIV
|
Human
Immunodeficiency Virus. HIV (also called HIV-1), a retrovirus,
causes AIDS. A similar retrovirus, HIV-2, causes a variant
disease, sometimes referred to as West African AIDS. HIV
infection leads to the destruction of the immune
system.
|
|
IgG
|
IgG
or Immunoglobulin are proteins found in human blood. This protein is
called an “antibody” and is an important part of the body’s defense
against disease. When the body is attacked by harmful bacteria or viruses,
antibodies help fight these invaders.
|
|
MOH
|
Ministry
of Health
|
|
MOU
|
Memoranda
of Understanding
|
|
NGO
|
Non-Governmental
Organization
|
|
OTC
|
Over-the-Counter
|
|
PEPFAR
|
The
President’s Emergency Plan for AIDS Relief
|
|
PMA
|
Pre-Marketing
Approval –FDA approval classification for a medical device that is
not substantially equivalent to a legally marketed device or is otherwise
required by statute to have an approved application. Rapid HIV
tests must have an approved PMA application before marketing of such a
product can begin.
|
|
PROTOCOL
|
A
procedure pursuant to which an immunodiagnostic test is performed on a
particular specimen in order to obtain the desired
reaction.
|
|
REAGENT
|
A
chemical added to a sample under investigation in order to cause a
chemical or biological reaction which will enable measurement or
identification of a target substance.
|
|
RETROVIRUS
|
A
type of virus which contains the enzyme Reverse Transcriptase and is
capable of transforming infected cells to produce diseases in the host
such as AIDS.
|
|
SAB
|
Staff
Accounting Bulletin
|
|
SENSITIVITY
|
Refers
to the ability of an assay to detect and measure small quantities of a
substance of interest. The greater the sensitivity, the smaller the
quantity of the substance of interest the assay can
detect. Also refers to the likelihood of detecting the antigen
when present.
|
|
SPECIFICITY
|
The
ability of an assay to distinguish between similar
materials. The greater the specificity, the better an assay is
at identifying a substance in the presence of substances of similar
makeup.
|
|
SPUTUM
|
Expectorated
matter; saliva mixed with discharges from the respiratory
passages
|
|
TB
|
Tuberculosis
(TB) is a disease caused by bacteria called Mycobacterium tuberculosis.
The bacteria usually attack the lungs. But, TB bacteria can attack any
part of the body such as the kidney, spine, and brain. If not treated
properly, TB disease can be fatal. TB is spread through the air
from one person to another. The bacteria are put into the air when a
person with active TB disease of the lungs or throat coughs or sneezes.
People nearby may breathe in these bacteria and become
infected.
|
|
UNAIDS
|
Joint
United Nations Program on HIV/AIDS
|
|
USAID
|
United
States Agency for International Development
|
|
USDA
|
U.S
Department of Agriculture
|
|
WHO
|
World
Health Organization
|
13
|
ITEM
1A.
|
RISK
FACTORS
|
You
should carefully consider each of the following risk factors and all of the
other information provided in this Annual Report. The risks described
below are those we currently believe may materially affect us. An
investment in our Common Stock involves a high degree of risk, and should be
considered only by persons who can afford the loss of their entire
investment.
Risks
related to our industry, business and strategy
Because
we may not be able to obtain necessary regulatory approvals for some of our
products, we may not generate revenues in the amounts we expect, or in the
amounts necessary to continue our business.
All of
our proposed and existing products are subject to regulation in the U.S. by the
U.S. Food and Drug Administration, the U.S. Department of Agriculture and/or
other domestic and international governmental, public health agencies,
regulatory bodies or non-governmental organizations. In particular,
we are subject to strict governmental controls on the development, manufacture,
labeling, distribution and marketing of our products. The process of
obtaining required approvals or clearances varies according to the nature of,
and uses for, a specific product. These processes can involve lengthy
and detailed laboratory testing, human or animal clinical trials, sampling
activities, and other costly, time-consuming procedures. The
submission of an application to a regulatory authority does not guarantee that
the authority will grant an approval or clearance for product. Each
authority may impose its own requirements and can delay or refuse to grant
approval or clearance, even though a product has been approved in another
country.
The time
taken to obtain approval or clearance varies depending on the nature of the
application and may result in the passage of a significant period of time from
the date of submission of the application. Delays in the approval or
clearance processes increase the risk that we will not succeed in introducing or
selling the subject products, and we may determine to devote our resources to
different products.
Changes
in government regulations could increase our costs and could require us to
undergo additional trials or procedures, or could make it impractical or
impossible for us to market our products for certain uses, in certain markets,
or at all.
Changes
in government regulations may adversely affect our financial condition and
results of operations because we may have to incur additional expenses if we are
required to change or implement new testing, manufacturing and control
procedures. If we are required to devote resources to develop such
new procedures, we may not have sufficient resources to devote to research and
development, marketing, or other activities that are critical to our
business.
For
example, the European Union and other jurisdictions have a requirement that
diagnostic medical devices used to test human biological specimens must receive
regulatory approval known as a CE mark, or be registered under the ISO 13.485
medical device directive. The letters “CE” are the abbreviation of
the French phrase “Conforme Européene,” which means “European
conformity.” ISO (“International Organization for Standardization”)
is the world’s largest developer of standards with 148 member
countries. As such, export to the European and other jurisdictions
without the CE or ISO 13.485 mark is not possible. In 2007, we
received ISO 13.485 certification, in 2008, we received a CE registration for
our Chagas test, and during 2009 we expect to receive CE registration for our
two FDA approved HIV tests. However, there are no assurances that we
will be able to secure this certification although we are not aware of any
material reason why such approval will not be granted. However, if
for any reason a CE registration is not granted, our ability to export our
products could be adversely impacted.
We can
manufacture and sell our products only if we comply with regulations of
government agencies such as the FDA and the USDA. We have implemented
a quality system that is intended to comply with applicable
regulations. Although FDA approval is not required for the export of
our products, there are export regulations promulgated by the FDA that
specifically relate to the export of our products. Although we
believe that we meet the regulatory standards required for the export of our
products, these regulations could change in a manner that could adversely impact
our ability to export our products.
14
Our
products may not be able to compete with new diagnostic products or existing
products developed by well-established competitors, which would negatively
affect our business.
The
diagnostic industry is focused on the testing of biological specimens in a
laboratory or at the point-of-care and is highly competitive and rapidly
changing. Our principal competitors often have considerably greater
financial, technical and marketing resources than we do. Several
companies produce diagnostic tests that compete directly with our testing
product line, including but not limited to, Orasure Technologies, Inverness
Medical and Trinity Biotech. As new products enter the market, our
products may become obsolete or a competitor’s products may be more effective or
more effectively marketed and sold than ours. Although we have no
specific knowledge of any competitor’s product that will render our products
obsolete, if we fail to maintain and enhance our competitive position or fail to
introduce new products and product features, our customers may decide to use
products developed by our competitors, which could result in a loss of revenues
and cash flow.
We are
developing an oral fluid rapid HIV test as well as other applications utilizing
our Dual Path Platform technology, which we believe could enhance our
competitive position in HIV rapid testing and other fields. During
2008 we completed development of our initial DPP® products for the detection of
antibodies to HIV 1 & 2 in oral fluid as well as blood samples, and a
product for the detection of canine leishmaniasis. However we still
have technical, manufacturing, regulatory and marketing challenges to meet
before we will know whether we can successfully commercialize products
incorporating this technology. There can be no assurance that we will
overcome these challenges.
We have
granted Inverness exclusive rights to market our SURE CHECK® HIV 1/2 in the
United States, Europe and Asia and our HIV 1/2 STAT PAK® in the
U.S. Inverness has no rapid HIV tests that are approved for marketing
in the U.S., we are not aware of any rapid HIV products that Inverness is even
contemplating for the U.S., and Inverness is obligated to inform us of any such
products as soon as it is able to do so. Inverness does have rapid
HIV tests manufactured by certain of its subsidiaries outside the U.S. that are
being actively marketed outside the U.S., primarily in developing
countries. Our HIV 1/2 STAT PAK cassette and dipstick products
compete against these Inverness products, and we specifically acknowledge in our
agreements with Inverness the existence of such other
products. Moreover, except for a product in the HIV barrel field as
defined in our agreement with Inverness, Inverness is permitted under our
agreements to market certain types of permitted competing rapid HIV tests in the
U.S. Under these conditions, we could choose to terminate the
applicable agreement with Inverness or change the agreement to a non-exclusive
agreement, and Inverness would expand the lateral flow license granted to the
Company to allow the Company to market the product independently or through
other marketing partners. While we believe that Inverness is
committed to successfully marketing our products particularly in the U.S. and
other developed countries where our products are or become approved for
marketing, Inverness may choose to develop or acquire competing products for
marketing in the U.S. as well as other markets where they are marketing our SURE
CHECK® HIV 1/2 product, and such an action could have at least a temporary
material adverse effect on the marketing of these products until such time as
alternative marketing arrangements could be implemented. While we
also believe that the expansion of our license to the Inverness lateral flow
patents substantially facilitates our ability to make alternative marketing
arrangements, there can be no assurance that the modification of marketing
arrangements and the possible corresponding delays or suspension of sales would
not have a material adverse effect on our business.
In
addition, the point-of-care diagnostics industry is undergoing rapid
technological changes, with frequent introductions of new technology-driven
products and services. As new technologies become introduced into the
point-of-care diagnostic testing market, we may be required to commit
considerable additional efforts, time and resources to enhance our current
product portfolio or develop new products. We may not have the
available time and resources to accomplish this and many of our competitors have
substantially greater financial and other resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers, which would materially harm our
operating results.
We own no
issued patents covering lateral flow technology, and the field of lateral flow
technology is complex and characterized by a substantial amount of litigation,
so the risk of potential patent challenges is ongoing for us in spite of our
pending patent applications.
Although
we have been granted non-exclusive licenses to the lateral flow patents owned by
Inverness Medical Innovations, Inc. , there is no assurance that their lateral
flow patents will not be challenged or that licenses from other parties may not
be required, if available at all. In the event that it is determined
that a license is required and it is not possible to negotiate a license
agreement under a necessary patent, we may be able to modify our HIV rapid test
products and other products such that a license would not be
necessary. However, this alternative could delay or limit our ability
to sell these products in the U.S. and other markets, which would adversely
affect our results of operations, cash flows and business.
15
During
2008 Inverness and Church & Dwight commenced a patent infringement suit
against Orasure Technologies, Inc. based on Orasure’s alleged infringement of
one of Church & Dwight’s and Inverness’ (the parties have joint rights to
this patent) main patents covering lateral flow technology. Orasure
has alleged that it does not infringe such patent and that such patent is
invalid. A judgment adverse to Inverness stating that Orasure’s
product does not infringe the Inverness patent or invalidating the Inverness
patent, which patent Inverness has successfully used to restrict competition in
selected product areas core to Inverness’ business, could potentially open up
the US rapid HIV test market to other competitors, and thereby have a material
and adverse effect on our business. A settlement by Inverness with
Orasure, depending on its terms, could also have a material effect on our
business, which effect could be beneficial or detrimental.
On
March 13, 2007, our Dual Path Platform Immunoassay Device patent
application was issued as United States patent
no. 7,189,522. Additional protection for this intellectual
property is pending worldwide. This platform has shown improved
sensitivity as compared with conventional platforms in a number of preliminary
studies using well characterized samples. We believe that this new
platform is outside of the scope of currently issued patents in the field of
lateral flow technology, thereby offering the possibility of a greater freedom
to operate. However there can be no assurance that our patents or our
products incorporating the patent claims will not be challenged at some time in
the future.
New
developments in health treatments or new non-diagnostic products may reduce or
eliminate the demand for our products.
The
development and commercialization of products outside of the diagnostics
industry could adversely affect sales of our products. For example,
the development of a safe and effective vaccine to HIV or treatments for other
diseases or conditions that our products are designed to detect, could reduce,
or eventually eliminate, the demand for our HIV or other diagnostic products and
result in a loss of revenues.
We
may not have sufficient resources to effectively introduce and market our
products, which could materially harm our operating results.
Introducing
and achieving market acceptance for our rapid HIV tests and other new products
will require substantial marketing efforts and will require us or our contract
partners, sales agents, or distributors to make significant expenditures of time
and money. In some instances we will be significantly or
totally reliant on the marketing efforts and expenditures of our contract
partners, sales agents, distributors. If they do not have or commit
the expertise and resources to effectively market the products that we
manufacture, our operating results will be materially harmed.
The
success of our business depends, in addition to the market success of our
products, on our ability to raise additional capital through the sale of debt or
equity or through borrowing, and we may not be able to raise capital or borrow
funds in amounts necessary to continue our business, or at all.
Our
revenues and gross margins have increased significantly in recent periods, and
our operating and net losses have decreased significantly in recent
periods. Nevertheless we have sustained significant operating losses
in 2008, 2007 and 2006. At December 31, 2008, we had a stockholders’
equity of $2.58 million and a working capital surplus of $1.66 million. The Company
estimates that its resources are sufficient to fund its needs through the end of
2009 and beyond or that, in the alternative, it could raise additional capital
although the terms under which that capital could be raised would likely be very
dilutive to current shareholders. The Company’s liquidity
and cash requirements will depend on several factors. These factors include (1)
the level of revenues (the Company received $340,000 in 2009 for license fees
for which we need to meet certain milestones to earn); (2) the extent to which,
if any, that revenue level improves operating cash flows; (3) the Company’s
investments in research and development, facilities, marketing, regulatory
approvals, and other investments it may determine to make; and (4) the
investment in capital equipment (including production equipment of $323,500 that
the Company has contracted for) and the extent to which it improves cash flow
through operating efficiencies. There are no assurances that the Company will
become profitable or generate positive cash flow by the end of 2009 or, in the
alternative, be successful in raising sufficient capital to fund its needs
through 2009.
Our
objective of increasing international sales is critical to our business plan and
if we fail to meet this objective, we may not generate revenues in the amounts
we expect, or in amounts necessary to continue our business.
We intend
to attempt to increase international sales of our products. A number
of factors can slow or prevent international sales, or substantially increase
the cost of international sales, including:
|
·
|
regulatory
requirements and customs
regulations;
|
|
·
|
cultural
and political differences;
|
|
·
|
foreign
exchange rates, currency fluctuations and
tariffs;
|
|
·
|
dependence
on and difficulties in managing international distributors or
representatives;
|
|
·
|
the
creditworthiness of foreign
entities;
|
|
·
|
difficulties
in foreign accounts receivable collection;
and
|
|
·
|
economic
conditions and the absence of available funding
sources.
|
If we are
unable to increase our revenues from international sales, our operating results
will be materially harmed.
16
We
rely on trade secret laws and agreements with our key employees and other third
parties to protect our proprietary rights, and we cannot be sure that these laws
or agreements adequately protect our rights.
We
believe that factors such as the technological and creative skills of our
personnel, strategic relationships, new product developments, frequent product
enhancements and name recognition are essential to our success. All
our management personnel are bound by non-disclosure agreements. If
personnel leave our employment, in some cases we would be required to protect
our intellectual property rights pursuant to common law theories which may be
less protective than provisions of employment, non-competition or non-disclosure
agreements.
We seek
to protect our proprietary products under trade secret and copyright laws, enter
into license agreements for various materials and methods employed in our
products, and enter into strategic relationships for distribution of the
products. These strategies afford only limited
protection. We currently have no foreign patents, though we are
seeking patent protection in several foreign jurisdictions for our DPP®
technology. We have licenses to reagents (antigens and peptides) used
in several of our products and products under development We also
have a license to manufacture, use and sell products used to screen for
antibodies to HIV-2. In addition, our SURE CHECK®, DPP® and STAT-PAK®
trademarks have been registered in the U.S. Despite our efforts to
protect our proprietary assets, and respect the intellectual property rights of
others, we participate in several markets where intellectual property rights
protections are of little or no value. This can place our products
and our company at a competitive disadvantage.
During
2008 and in the first quarter of 2009 we terminated a number of employees who
have had access to proprietary and confidential information. In
connection with the termination of several of these employees whose positions
were terminated, individuals executed severance agreements that include strong
covenants by these former employees to keep our proprietary information
confidential. Despite these and other efforts we make to protect our
confidential information, unauthorized parties may attempt to copy aspects of
our products or to obtain information that we regard as
proprietary. We may be required to expend substantial resources in
asserting or protecting our intellectual property rights, or in defending suits
related to intellectual property rights. Disputes regarding
intellectual property rights could substantially delay product development or
commercialization activities because some of our available funds would be
diverted away from our business activities. Disputes regarding
intellectual property rights might include state, federal or foreign court
litigation as well as patent interference, patent reexamination, patent reissue,
or trademark opposition proceedings in the U.S. Patent and Trademark
Office.
To
facilitate development and commercialization of a proprietary technology base,
we may need to obtain additional licenses to patents or other proprietary rights
from other parties. Obtaining and maintaining these licenses, which
may not be available, may require the payment of up-front fees and
royalties. In addition, if we are unable to obtain these types of
licenses, our product development and commercialization efforts may be delayed
or precluded.
Our
continued growth depends on retaining our current key employees and attracting
additional qualified personnel, and we may not be able to do so.
Our
success will depend to a large extent upon the skills and experience of our
executive officers, management and sales, marketing, operations and scientific
staff. We may not be able to attract or retain qualified employees in
the future due to the intense competition for qualified personnel among medical
products businesses, geographic considerations, our ability to offer competitive
compensation , relocation packages, benefits, and/or other reasons.
If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will adversely affect
our ability to effectively manufacture, sell and market our products to meet the
demands of our strategic partners in a timely fashion, or to support internal
research and development programs. Although we believe we will be
successful in attracting and retaining qualified personnel, competition for
experienced scientists and other personnel from numerous companies and academic
and other research institutions may limit our ability to do so on acceptable
terms.
17
We have
entered into employment contracts with our President, Lawrence Siebert, and our
Senior Vice President of Research and Development, Javan
Esfandiari. Due to the specific knowledge and experience of these
executives regarding the industry, technology and market, the loss of the
services of either one of them would likely have a material adverse effect on
the Company. The contract with Mr. Siebert had a term of two years
ending May 2008, which the board of directors extended for one year, and
the contract with Mr. Esfandiari has a term of three years ending
March 2010. We have obtained a key man insurance policy for Mr.
Esfandiari.
We
believe our success depends on our ability to participate in large government
programs in the U.S. and worldwide and we may not be able to do so.
We
believe it to be in our best interests to meaningfully participate in the PEPFAR
Program, UN Global Fund initiatives and other programs funded by large
donors. We have initiated several strategies to participate in these
programs. Participation in these programs requires alignment and
engagement with the many other participants in these programs including the
World Health Organization, U.S. Center for Disease Control, U.S. Agency for
International Development, foreign governments and their agencies,
non-governmental organizations, and HIV service organizations. If we
are unsuccessful in our efforts to participate in these programs, our operating
results could be materially harmed.
We
have a history of incurring net losses and we cannot be certain that we will be
able to achieve profitability.
Since the
inception of Chembio Diagnostic Systems, Inc. in 1985 and through the period
ended December 31, 2008, we have incurred net losses. As of
December 31, 2008, we have an accumulated deficit of $37
million. We incurred net losses of $1.9 million and $2.6 million in
2008 and 2007, respectively.
We expect
to continue to make substantial expenditures for sales and marketing, regulatory
submissions, product development and other purposes, though within reasonable
limitations that we believe are necessary in order to continue our making
progress toward profitability without requiring additional
capital. Our ability to achieve profitability in the future will
primarily depend on our ability to increase sales of our products, reduce
production and other costs and successfully introduce new products and enhanced
versions of our existing products into the marketplace. If we are
unable to increase our revenues at a rate that is sufficient to achieve
profitability, or adequately control and reduce our operating costs, our
operating results would be materially harmed.
To
the extent that we are unable to obtain sufficient product liability insurance
or that we incur product liability exposure that is not covered by our product
liability insurance, our operating results could be materially
harmed.
We may be
held liable if any of our products, or any product which is made with the use or
incorporation of any of the technologies belonging to us, causes injury of any
type or is found otherwise unsuitable during product testing, manufacturing,
marketing, sale or usage. We have obtained product liability
insurance, we have never received a product liability claim, and have generally
not seen product liability claims for screening tests that are accompanied by
appropriate disclaimers. Nevertheless, in the event there is a claim,
this insurance may not fully cover our potential liabilities. In
addition, as we attempt to bring new products to market, we may need to increase
our product liability coverage which would be a significant additional expense
that we may not be able to afford. If we are unable to obtain
sufficient insurance coverage at an acceptable cost to protect us, we may be
forced to abandon efforts to commercialize our products or those of our
strategic partners, which would reduce our revenues.
Risks
related to our Common Stock
In
the past, our Common Stock has been classified as penny stock, and it continues
to be extremely illiquid, so investors may not be able to sell as much stock as
they want at prevailing market prices.
In the
past, our Common Stock has been classified as penny stock. Penny
stocks generally are equity securities with a price of less than $5.00 and trade
on the over-the-counter market. As a result, an investor may find it
more difficult to dispose of or obtain accurate quotations as to the price of
the securities that are classified as penny stocks. The “penny stock”
rules adopted by the Commission under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), subject the sale of the shares of penny stock
issuers to regulations that impose sales practice requirements on
broker-dealers, causing many broker-dealers to not trade penny stocks or to only
offer the stocks to sophisticated investors that meet specified net worth or net
income criteria identified by the Commission. These regulations
contribute to the lack of liquidity of penny stocks.
18
At the
present time, transactions in our Common Stock are not subject to the “penny
stock” rules because our average revenue for 2006, 2007 and 2008 exceeded $6
million per year. However, there can be no assurance that
transactions in our Common Stock will not be subject to the “penny stock” rules
in the future.
The
average daily trading volume of our Common Stock on the over-the-counter market
was less than 16,000 shares per day over the three months ended March 16,
2009. If limited trading in our stock continues, it may be difficult
for investors to sell their shares in the public market at any given time at
prevailing prices.
Our
management and larger stockholders exercise significant control over our Company
and may approve or take actions that may be adverse to your
interests.
As of
March 17, 2009, our named executive officers, directors and 5% stockholders
beneficially owned approximately 63.7% of our voting power. For the
foreseeable future, to the extent that our current stockholders vote similarly,
they will be able to exercise control over many matters requiring approval by
the board of directors or our stockholders. As a result, they will be
able to:
|
·
|
control
the composition of our board of
directors;
|
|
·
|
control
our management and policies;
|
|
·
|
determine
the outcome of significant corporate transactions, including changes in
control that may be beneficial to stockholders;
and
|
|
·
|
act
in each of their own interests, which may conflict with, or be different
from, the interests of each other or the interests of the other
stockholders.
|
|
ITEM
2.
|
PROPERTIES
|
Our
administrative offices and research facilities are located in Medford, New
York. We lease approximately 18,200 square feet of industrial space
for $11,987 per month. The space is utilized for research and
development activities (approximately 2,660 square feet), offices (approximately
1,820 square feet) and production (approximately 13,720 square
feet). The lease term expires on April 30, 2009, and the Company has
an option to renew for an additional two
years. Additional space may be required as we expand our
research and development activities. We do not foresee any
significant difficulties in obtaining any required additional
facilities.
As of the
filing date of this Annual Report, the Company is in discussion
for a lease extension for its administrative offices and research
facilities. The principle terms being discussed are as
follows: (a) a lease term of five years; (b) an initial rent of
$11,350 per month; (c) the monthly rent for year two of the lease will
increase by the lower of (i) the change in the consumer price index, or
(ii) five percent; and (d) the monthly rent for years three through
five of the lease will increase each year by the lower of (i) the change in
the consumer price index, or (ii) two and one half percent. Although
the Company believes that the extension will be entered into on terms that are
substantially similar to the terms being discussed, there is no assurance
that this will occur.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. We know of no material,
existing or pending legal proceedings against us, nor are we involved as a
plaintiff in any material proceeding or pending litigation. There are
no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial shareholder, is an adverse party or has a material
interest that is adverse to our interest.
19
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CEMI.” The table below sets forth the high and low bid prices per
share of our common stock for each quarter of our two most recently completed
fiscal years. These prices represent inter-dealer quotations without
retail markup, markdown, or commission and may not necessarily represent actual
transactions.
|
Fiscal
Year 2008
|
High
Bid
|
Low
Bid
|
|
First
Quarter
|
$0.30
|
$0.11
|
|
Second
Quarter
|
$0.26
|
$0.08
|
|
Third
Quarter
|
$0.28
|
$0.15
|
|
Fourth
Quarter
|
$0.21
|
$0.10
|
|
Fiscal
Year 2007
|
High
Bid
|
Low
Bid
|
|
First
Quarter
|
$0.93
|
$0.61
|
|
Second
Quarter
|
$0.65
|
$0.47
|
|
Third
Quarter
|
$0.65
|
$0.37
|
|
Fourth
Quarter
|
$0.57
|
$0.26
|
Rule
15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule,
imposes requirements on broker/dealers who sell securities subject to the rule
to persons other than established customers and accredited
investors. For transactions covered by the rule, brokers/dealers must
make a special suitability determination for purchasers of the securities and
receive the purchaser’s written agreement to the transaction prior to
sale. The Securities and Exchange Commission also has rules that
regulate broker/dealer practices in connection with transactions in “penny
stocks.” Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in that security is provided by the
exchange or system), except for securities of companies that have tangible net
assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the
previous three years. The Penny Stock Rule requires a broker/ dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker/dealer also must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker/dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker/dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. These disclosure
requirements have the effect of reducing the level of trading activity in the
secondary market for penny stock issues. As a result of these rules,
investors sometimes find it difficult to sell shares of penny stock
issuers. At the present time, transactions in our common stock are
not subject to the Penny Stock Rule because our average revenue for 2006, 2007
and 2008 exceeded $6 million per year. However, there can be no
assurance that transactions in our common stock will not be subject to the Penny
Stock Rule in the future.
20
Holders
As of
January 15, 2009, there were approximately 875 record owners of our common
stock.
Dividends
The
Company has never paid cash dividends on its common stock and has no plans to do
so in the foreseeable future.
Equity
Compensation Plan Information
|
Combined
Equity Compensation Plans - Information as of December 31,
2008
|
|||
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans approved by security holders1
|
2,416,6501
|
$0.366
|
4,566,350
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
2,416,650
|
$0.366
|
4,566,350
|
1 The
“Number of Securities to be Issued Upon Exercise of Outstanding Warrants and
Rights” represents 1,983,000 from the 1999 Stock Option Plan and
433,650 under the 2008 Stock Incentive Plan. The “Number of
Securities Remaining Available for Future Issuance Under Equity Compensation
Plans” represents shares issuable under the 2008 Stock Incentive
Plan. The Company currently has no intention to issue additional
securities under the 1999 Stock
Option Plan.
ITEM
6. SELECTED FINANCIAL DATA
Presented
in this table are selected financial data for the past five years ending
December 31, 2008. Prior year’s financial statements have been
reclassified to conform to current year presentation (See discussion in ITEM 7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Gross Margin). As of the year ended December 31, 2008 the Company
reclassified its royalty and license expenses to cost of goods sold, instead of
selling, general and administrative expenses.
21
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||
|
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
December
31, 2006
|
December
31, 2005
|
December
31, 2004
|
||||||||||||||||||||||||||
|
TOTAL
REVENUES
|
$ | 11,049,571 | $ | 9,230,948 | $ | 6,502,480 | $ | 3,940,730 | $ | 3,305,932 | ||||||||||||||||||||
|
GROSS
PROFIT
|
3,851,721 | 35 | % | 2,795,710 | 30 | % | 1,608,272 | 25 | % | 944,648 | 24 | % | 623,242 | 19 | % | |||||||||||||||
|
OVERHEAD
COSTS:
|
||||||||||||||||||||||||||||||
|
Research
and development expenses
|
2,605,343 | 24 | % | 1,906,653 | 21 | % | 1,401,472 | 22 | % | 1,364,898 | 35 | % | 1,508,849 | 46 | % | |||||||||||||||
|
Selling,
general and administrative expenses
|
3,317,046 | 30 | % | 3,765,221 | 41 | % | 4,786,993 | 74 | % | 2,877,737 | 73 | % | 2,217,755 | 67 | % | |||||||||||||||
| 5,922,389 | 5,671,874 | 6,188,465 | 4,242,635 | 3,726,604 | ||||||||||||||||||||||||||
|
LOSS
FROM OPERATIONS
|
(2,070,668 | ) | (2,876,164 | ) | (4,580,193 | ) | (3,297,987 | ) | (3,103,362 | ) | ||||||||||||||||||||
|
OTHER
INCOME (EXPENSES):
|
121,898 | 249,272 | (414,827 | ) | 45,987 | 4,471 | ||||||||||||||||||||||||
|
NET
LOSS
|
(1,948,770 | ) | -18 | % | (2,626,892 | ) | -28 | % | (4,995,020 | ) | -77 | % | (3,252,000 | ) | -83 | % | (3,098,891 | ) | -94 | % | ||||||||||
|
Dividends
accreted/payable in stock to preferred stockholders and a beneficial
conversion feature
|
- | 5,645,310 | 3,210,046 | 3,517,022 | 1,943,073 | |||||||||||||||||||||||||
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | (1,948,770 | ) | -18 | % | $ | (8,272,202 | ) | -90 | % | $ | (8,205,066 | ) | -126 | % | $ | (6,769,022 | ) | -172 | % | $ | (5,041,964 | ) | -153 | % | |||||
|
Basic
and diluted loss per share
|
$ | (0.03 | ) | $ | (0.57 | ) | $ | (0.80 | ) | $ | (0.88 | ) | $ | (0.85 | ) | |||||||||||||||
|
Weighted
average number of shares outstanding, basic and diluted
|
61,266,954 | 14,608,478 | 10,293,168 | 7,705,782 | 5,966,769 | |||||||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||||||||
|
Working
capital
|
$ | 1,663,914 | $ | 3,228,724 | $ | 5,113,233 | $ | 4,707,957 | $ | (504,825 | ) | |||||||||||||||||||
|
Total
assets
|
5,914,941 | 6,584,997 | 7,906,577 | 7,074,644 | 1,373,760 | |||||||||||||||||||||||||
|
Total
liabilities
|
3,337,609 | 2,322,171 | 2,297,193 | 1,963,703 | 1,950,413 | |||||||||||||||||||||||||
|
Shareholders'
equity (deficit)
|
2,577,332 | 4,262,826 | (939,807 | ) | 1,052,703 | (523,964 | ) | |||||||||||||||||||||||
22
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
This
discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion
and analysis of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent liabilities at the financial statement date and
reported amounts of revenue and expenses during the reporting period. On an
ongoing basis we review our estimates and assumptions. Our estimates were based
on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not believe
such differences will materially affect our financial position or results of
operations. Our critical accounting policies, the policies we believe are most
important to the presentation of our financial statements and require the most
difficult, subjective and complex judgments, are outlined below in ‘‘Critical
Accounting Policies,’’ and have not changed significantly.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. Specifically, 1) our ability to obtain necessary
regulatory approvals for our products; and 2) our ability to increase revenues
and operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as “may,” “could”, “will,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continues” or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
Except as
may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not
assume that our silence over time means that actual events are bearing out as
expressed or implied in such forward-looking statements. You should
carefully review and consider the various disclosures we make in this report and
our other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks, uncertainties and other factors that
may affect our business.
The
following management discussion and analysis relates to the business of the
Company, including its subsidiaries, which develop, manufacture, and market
rapid diagnostic tests that detect infectious diseases. The Company’s main
products presently commercially available are three rapid tests for the
detection of HIV antibodies in whole blood, serum and plasma samples, all of
which employ lateral flow technology and two of which were approved by the FDA
in 2006. In addition, we have a fourth rapid HIV test, more recently
developed on our patented Dual Path Platform (DPP®) technology, for the
detection of antibodies to HIV in oral fluid samples, as well as in whole blood,
serum and plasma samples. The products which employ lateral flow technology are
manufactured and sold under a non-exclusive license we
have from Inverness Medical Innovations, Inc. (“Inverness”), which is
also our exclusive marketing partner for
the FDA-approved products in the United States (as well as
Europe and Asia for the product that is known as the “barrel” format product)
under its Clearview® brand. Inverness launched its marketing of these
products in the United States in February 2007. Chembio’s two HIV
STAT-PAK® rapid HIV tests (in cassette and dipstick formats) are marketed
outside the United States through different partners and channels under our
license from Inverness.
Rapid HIV
tests represented nearly 90% of the Company’s product revenues in 2008. The
Company also has other rapid tests that together represented approximately 10%
of sales in 2008. The Company’s products are sold to medical laboratories and
hospitals, governmental and public health entities, non-governmental
organizations, medical professionals and retail establishments. Chembio’s
products are sold under the Company’s STAT PAK® or SURE CHECK ® registered
trademarks or under the private labels of its marketing partners, for example
the Clearview® label owned by Inverness Medical Innovations, Inc.
23
All of
the Company’s future products that are currently being developed are based on
its patented Dual Path Platform (DPP®), which is a unique diagnostic
point-of-care platform that has certain advantages over lateral flow
technology. In 2008 the Company completed development of its first
two products that employ the DPP® technology and it has a number of additional
products under development that employ the DPP® technology. These
product development activities are further explained below.
Oswaldo
Cruz Foundation Agreements
During
2008 we signed four agreements with the Oswaldo Cruz Foundation (FIOCRUZ) in
Brazil relating to products for Leptospirosis, Leishmaniasis, screening for HIV
1/2 with oral fluid samples, and confirmation of HIV 1. We have
completed development of two of the products (Leishmaniasis and HIV oral fluid
screening test), and substantially completed development of the other
two. All four of these products are or will be undergoing regulatory
approval evaluations in Brazil; we expect that all of these products will be
approved by ANVISA for distribution by FIOCRUZ in Brazil during 2009, triggering
initial orders as well as approximately $1MM in technology transfer fee payments
to the Company in 2009. We received purchase orders from FIOCRUZ in
the fourth quarter of 2008 for approximately $500,000 of the Leishmaniasis
product; however due to the delay in FIOCRUZ receiving necessary import
authorizations for the second and larger portion of this order, approximately
$380,000 of this amount could not be shipped in December and was instead shipped
during the first quarter of 2009. Also, based upon additional
features that we are adding to the HIV confirmatory test, we are finalizing a
revised agreement for this product which we believe will provide us with a
larger market opportunity for this product in Brazil subject to regulatory
approval and other conditions.
On April
16, 2008, we announced a new development agreement with Bio-Rad Laboratories
N.A.., a part of Bio-Rad Laboratories Inc, a leading in-vitro diagnostic and
life science company. The agreement with Bio-Rad is for the
development of a new multiplex product that is being developed on DPP® and which
would be marketed by Bio-Rad under a limited exclusive license from Chembio to
Bio-Rad that is limited to this field of application. Our agreement with Bio-Rad
contemplated that we would enter into a license agreement effective no later
than December 2008 subject to Bio-Rad being satisfied with development progress
and other conditions. We in fact did enter into this license
agreement in January 2009 with a December 31, 2008 effective date and have
received a $340,000 payment for this license. Development of this
product is anticipated to continue through 2009, funded by Bio-Rad at a cost of
$125,000 every six months. The agreement is terminable at any time by
Bio Rad and, under certain circumstances, some or all of the $340,000 license
fee is refundable.
DPP®
HIV Oral Fluid Test Status
Having
completed development of this product in 2008 for international sales, we are
now in the initial stages of commercializing it to participate in the US and
global markets. We are initially pursuing approval and registration
of this product in the large markets globally including but not limited to those
markets where we have been successful with our current lateral flow tests that
only use finger-stick whole blood and other blood matrices (venous whole blood,
serum and plasma). Our product is being included in a study in Africa
that is being conducted by a governmental organization interested in the
possibility of expanded use of oral fluid based tests. We are also
negotiating an agreement with a large global in-vitro diagnostic products
company that would have exclusive marketing rights to this product in the United
States market under a co-branding of the product that would include the DPP®
trademark in the name of the product. (See RECENT DEVELOPMENTS AND
CHEMBIO’S PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS).
Progress
on DPP® Syphilis Screen and Confirm Multiplex Test
During
2008 and 2009 year to date, we made substantial progress on this product, with
extensive collaborative efforts with the CDC and others. We are
currently evaluating whether this product meets the performance objectives for
the US market while we continue to assess and focus on the market opportunity
for this product in the United States.
Other
DPP® Development Projects
Our
patented DPP® technology, combined with our development and manufacturing
experience and know-how, has enabled us to attract and enter into and pursue
third-party-funded product development opportunities that in turn add further to
our capabilities while subsidizing some of our R&D personnel and overall
overhead costs. This allows us to maintain a larger R&D staff
than we could otherwise justify, which also gives us some flexibility in how and
when we allocate resources. Included in our research and development
organization is a technical team that we created in 2008. This team
is able to transfer products from R&D into production and assist in
validation, is involved in supporting our manufacturing organization when the
need arises, and is also able to assist in pure development
activities. Creation of this team was an important accomplishment in
2008.
24
Chembio
continues to work with commercial, governmental and private organizations in
order to obtain research grants and other funding for development
projects. In this regard, we have entered into a development
agreement with Bio-Rad, which, subject to continued achievement of milestones
and other conditions, could result in approximately $200,000 of development
funds for Chembio in 2009. We also have DPPÒ grants from governmental
agencies for $55,000 for leprosy research and $110,000 for Human TB Serology
research in 2009. Our four technology transfer, supply and license
agreements with Oswaldo Cruz Foundation of Brazil could result in as much as
$1,050,000 of advance royalty payments. In addition to the projects
described, Chembio has applied for other research grants and is working on
entering into a number of other development agreements.
There can
be no assurance that any of these projects will continue, meet regulatory or
other technical requirements and specifications, and/or that if continued, will
result in completed products, or that such products, if successfully completed,
will be successfully commercialized.
Regulatory
Activities
We
continue to make progress on obtaining a Community European (CE) marking for our
products to indicate conformity with European Union health, safety and
environmental requirements. We have submitted the HIV 1/2 STAT-PAK® technical
file to our notified body and should complete all required steps for CE Marking
of this product during the second quarter of 2009. Under
our agreement with Inverness we are to obtain a CE Marking for the Clearview®
Complete HIV 1/2. We are prepared to submit the technical file for
this product on behalf of Inverness once we have received final proposed
labeling from Inverness.
We are
pursuing registrations of our lateral flow and DPP® HIV products in a number of
other jurisdictions, and also pursing registrations with the USDA of additional
claims for our veterinary tuberculosis products.
Recent
Events
During
the quarter ended December 31, 2008, Inverness Medical Innovations, Inc.
(“Inverness”) notified the Company that Inverness had entered into a contract
with Bio-Rad Laboratories, Inc. (“Bio-Rad”) for royalties on Bio-Rad’s patent
for the detection of HIV-2 antibodies. The agreement also provided
for Inverness to pay past royalties. The agreements between the
Company and Inverness provide that the Company is to share in these past
royalties and Inverness requested it be reimbursed for the Company’s share of
these past royalties. The Company and Inverness have agreed that this
liability, which is approximately $500,000, is to be paid from future revenues
over approximately the next 18 months.
For the
year ended December 31, 2008 the Company reclassified its royalty and license
expenses to cost of goods sold, instead of selling, general and administrative
expenses.
On
December 19, 2007 (the “Closing Date”), amendments to the governing documents
for the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”), not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”), were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants. Subsequent to these amendments, among other matters, all the
Preferred Stock and certain of the Non-Employee Warrants were converted to
shares of the Company’s common stock.
25
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008 AS COMPARED WITH THE YEAR
ENDED DECEMBER 31, 2007
Revenues:
|
Selected
Product Categories:
|
For
the years ended
|
|||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
|||||||||||||
|
HIV
|
$ | 9,192,297 | $ | 7,927,676 | $ | 1,264,621 | 15.95 | % | ||||||||
|
TB
|
281,555 | 111,403 | 170,152 | 152.74 | % | |||||||||||
|
Other
|
881,916 | 725,798 | 156,118 | 21.51 | % | |||||||||||
|
Net
Product Sales
|
10,355,768 | 8,764,877 | 1,590,891 | 18.15 | % | |||||||||||
|
Research
grant income
|
693,803 | 466,071 | 227,732 | 48.86 | % | |||||||||||
|
Total
Revenues
|
$ | 11,049,571 | $ | 9,230,948 | $ | 1,818,623 | 19.70 | % | ||||||||
Revenues
for our HIV tests and related components during the year ended December 31, 2008
increased by $1.26 million over the same period in 2007. This was
primarily attributable to increased sales in Brazil and sales to our distributor
in the United States, offset by the reduction of sales to Mexico from 2007 that
were not repeated in 2008. Sales of our TB product increased because
of additional products being approved. The increase in research grant
income was for grants and feasibility studies involving our patented DPP®
technology of which $651,000 was received and $694,000 was earned in 2008,
utilizing $43,000 in deferred revenues as of December 31, 2007. Sales
to Africa (see Note 13 of the financial statements) were primarily from Nigeria
of approximately $2.86 million. We have been advised recently that
our designation in Nigeria as one of the screening tests has changed to that of
the confirmatory test as this country moves from a parallel to a serial testing
algorithm, which we expect will significantly reduce our sales to Nigeria in
2009.
Gross
Margin:
|
Gross
Margin related to
|
For the years ended
|
|||||||||||||||
|
Net
Product Sales:
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
||||||||||||
|
Gross
Margin per Statement of Operations
|
$ | 3,851,721 | $ | 2,795,710 | $ | 1,056,011 | 37.77 | % | ||||||||
|
Less:
Research grant income
|
693,803 | 466,071 | 227,732 | 48.86 | % | |||||||||||
|
Gross
Margin from Net Product Sales
|
$ | 3,157,918 | $ | 2,329,639 | $ | 828,279 | 35.55 | % | ||||||||
|
Gross
Margin %
|
30.49 | % | 26.58 | % | ||||||||||||
The
increase in our gross margin resulted primarily from increased quantities of our
product sales and increased average unit prices on product sales and component
sales.
For the
year ended December 31, 2008, the Company reclassified its royalty and license
expenses to cost of goods sold. For all periods prior to the quarter
ended December 31, 2008 these expenses were previously reflected in selling,
general and administrative expenses. Without this reclassification of
royalty and license expenses from SG&A expense to Cost of Goods Sold, the
gross margin from product sales would have been $4.465 million, or 43.1%, and
$3.396 million, or 38.7%, for the years ended December 31, 2008 and 2007,
respectively.
26
Research and
Development:
This
category includes costs incurred for product research and development,
regulatory approvals, technical support, evaluations and
registrations.
|
Selected
expense lines:
|
For the years ended
|
|||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
|||||||||||||
|
Clinical &
Regulatory Affairs:
|
||||||||||||||||
|
Wages
and related costs
|
$ | 262,191 | $ | 188,050 | $ | 74,141 | 39.43 | % | ||||||||
|
Consulting
|
27,231 | 87,763 | (60,532 | ) | -68.97 | % | ||||||||||
|
Clinical
trials
|
138,792 | 29,664 | 109,128 | 367.88 | % | |||||||||||
|
Other
|
60,821 | (35,915 | ) | 96,736 | -269.35 | % | ||||||||||
|
Total
Regulatory
|
$ | 489,035 | $ | 269,562 | $ | 219,473 | 81.42 | % | ||||||||
|
R&D Other than
Regulatory:
|
||||||||||||||||
|
Wages
and related costs
|
$ | 1,354,557 | $ | 959,679 | $ | 394,878 | 41.15 | % | ||||||||
|
Consulting
|
138,436 | 102,075 | 36,361 | 35.62 | % | |||||||||||
|
Share-based
compensation
|
84,935 | 189,843 | (104,908 | ) | -55.26 | % | ||||||||||
|
Materials
and supplies
|
307,662 | 268,566 | 39,096 | 14.56 | % | |||||||||||
|
Other
|
230,718 | 116,928 | 113,790 | 97.32 | % | |||||||||||
|
Total
other than Regulatory
|
$ | 2,116,308 | $ | 1,637,091 | $ | 479,217 | 29.27 | % | ||||||||
|
Total
Research and Development
|
$ | 2,605,343 | $ | 1,906,653 | $ | 698,690 | 36.64 | % | ||||||||
Expenses
for Clinical & Regulatory Affairs for the year ended December 31,
2008 increased by $219,500 as compared to the same period in 2007. This was
primarily due to an increase in expenses related to internal DPP
testing, external clinical trials we contracted for in order to lower the
age limitation of our FDA approved rapid HIV tests from 18 to 13 years of age,
and also due to an increase in wages and related costs as we added to our
regulatory staff, offset by a decrease in the use of consultants
Expenses
other than Clinical & Regulatory Affairs increased by $479,200 in the
year ended December 31, 2008 as compared with the same period in 2007 and were
primarily related to an increase in personnel and material costs required to
perform the work related to funded feasibility studies and grants received,
all related to our patented DPP® technology, and to the establishment of a
technical group within the R&D department in order to support product
validations and transfers to production. These increases were
partially offset by a decrease in the cost of share-based compensation related
to the value of common stock and employee stock options issued to an employee
pursuant to a contract.
Subject
to the continuation of grant and feasibility income, the Company currently
plans to continue research and development spending at levels that will, net of
grant and feasibility study income, result in a net decrease in this spending
category.
27
Selling, General and
Administrative Expense:
|
Selected
expense lines:
|
For the years ended
|
|||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
|||||||||||||
|
Wages
and related costs
|
$ | 1,261,511 | $ | 1,642,185 | $ | (380,674 | ) | -23.18 | % | |||||||
|
Consulting
|
187,494 | 232,184 | (44,690 | ) | -19.25 | % | ||||||||||
|
Commissons
|
365,774 | 31,762 | 334,012 | 1051.61 | % | |||||||||||
|
Share-based
compensation
|
187,908 | 152,319 | 35,589 | 23.36 | % | |||||||||||
|
Marketing
materials
|
38,379 | 75,570 | (37,191 | ) | -49.21 | % | ||||||||||
|
Investor
relations
|
123,654 | 224,843 | (101,189 | ) | -45.00 | % | ||||||||||
|
Legal,
accounting and SOX 404 compliance
|
551,335 | 643,562 | (92,227 | ) | -14.33 | % | ||||||||||
|
Travel,
entertainment and trade shows
|
92,576 | 154,819 | (62,243 | ) | -40.20 | % | ||||||||||
|
Other
|
508,415 | 607,977 | (99,562 | ) | -16.38 | % | ||||||||||
|
Total
S, G &A
|
$ | 3,317,046 | $ | 3,765,221 | $ | (448,175 | ) | -11.90 | % | |||||||
Selling,
general and administrative expenses for the year ended December 31, 2008
decreased by 12% as compared with the same period in 2007. Reduced
personnel expenses, investor relations expenses, and professional fees were
partially offset by increases in sales commissions that resulted from
commissionable sales in Brazil that increased significantly in 2008 as compared
with 2007. The decreased cost of professional fees (legal, accounting
and section 404 of Sarbanes-Oxley) were related to the reduction of legal fees
related to the Plan (see Recent Events above), which were almost all incurred in
2007. These decreased costs were partially offset by increased fees
to our independent auditors.
Other Income and
Expense:
|
Other
Income and Expense
|
For
the years ended
|
|||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
|||||||||||||
|
Other
income
|
$ | 95,812 | $ | 120,862 | $ | (25,050 | ) | -20.73 | % | |||||||
|
Interest
income
|
34,403 | 145,289 | (110,886 | ) | -76.32 | % | ||||||||||
|
Interest
expense
|
(8,317 | ) | (16,879 | ) | 8,562 | -50.73 | % | |||||||||
|
Total
Other Income and Expense
|
$ | 121,898 | $ | 249,272 | $ | (127,374 | ) | -51.10 | % | |||||||
Other
income for the year ended December 31, 2008 decreased 21% as compared with the
same period in 2007 primarily as a result of a decrease in the net amounts
received from New York State related to a program for qualified emerging
technology companies. Interest income for the year ended
December 31, 2008 decreased due to a decrease in available funds to invest in
interest bearing accounts. Decreased interest expense in 2008
as compared with 2007 reflects the impact of lower interest payments for capital
leases nearing the end of their terms
28
LIQUIDITY
AND CAPITAL RESOURCES
|
For
the years ended
|
||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
$
Change
|
%
Change
|
|||||||||||||
|
Net
cash used in operating activities
|
$ | (1,194,227 | ) | $ | (1,345,796 | ) | $ | 151,569 | -11.26 | % | ||||||
|
Net
cash used in investing activities
|
(397,462 | ) | (410,425 | ) | 12,963 | -3.16 | % | |||||||||
|
Net
cash (used in) provided by financing activities
|
(23,458 | ) | 293,204 | (316,662 | ) | -108.00 | % | |||||||||
|
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
$ | (1,615,147 | ) | $ | (1,463,017 | ) | $ | (152,130 | ) | 10.40 | % | |||||
The
Company had a decrease in cash for the year ended December 31, 2008 as compared
to a lesser decrease in cash for the same period in 2007. The decrease during
the 2008 and 2007 periods is primarily attributable to the cash used in
operations.
The
Company had a working capital surplus of $1,664,000 at December 31, 2008 and a
working capital surplus of $3,229,000 at December 31, 2007. The
Company estimates that its resources are sufficient to fund its needs through
the end of 2009 and beyond or that, in the alternative, it could raise
additional capital although the terms under which that capital could be raised
would likely be very dilutive to current shareholders. The Company’s
liquidity and cash requirements will depend on several factors. These factors
include (1) the level of revenues (the Company received $340,000 in 2009 for
license fees for which we need to meet certain milestones to earn); (2) the
extent to which, if any, that revenue level improves operating cash flows; (3)
the Company’s investments in research and development, facilities, marketing,
regulatory approvals, and other investments it may determine to make; and (4)
the investment in capital equipment (including production equipment of $323,500
that the Company has contracted for) and the extent to which it improves cash
flow through operating efficiencies. There are no assurances that the Company
will become profitable or generate positive cash flow by the end of 2009 or, in
the alternative, be successful in raising sufficient capital to fund its
needs through 2009.
RECENT
DEVELOPMENTS AND CHEMBIO’S PLAN OF OPERATIONS FOR THE NEXT TWELVE
MONTHS
Please
see section entitled Recent Events above.
2008
During
2008 Chembio increased total revenues by 20% to $11.05MM, increased gross profit
by 38% to $3.85MM (based on the presentation in Item 6 Selected Financial Data
wherein our reclassification of Royalty Expense and License Fees, reclassified
to Cost of Goods Sold in our audited statements for 2008, were also
reclassified, for 2004-2007 for comparative purposes), and decreased Selling,
General & Administrative Expense by 12% to $3.32MM. Research and
Development Expense, net of Research Grant Income, increased 33% to
$1.91MM.
2008
revenue growth was attributable to our continued collaboration in Brazil with
Oswaldo Cruz Foundation and to strong sales growth to Africa, including but not
limited to Nigeria, to and through major programs led by the Global Fund and
PEPFAR. Even though our sales to Inverness were less in 2008 than in
2007, this was primarily a result of purchases made by Inverness at the time of
the launch in 2007 in excess of the actual demand from their customers in 2007,
which in turn was in part a result of delays in our obtaining both the age claim
amendment and the CLIA waiver for the barrel product (See Item 1. Business:
Regulatory Activities). We believe Inverness’ sales of our products
increased significantly in 2008 versus 2007, notwithstanding a voluntary
component (control kit) recall that occurred during the first half of 2008. With
continued sales increases by Inverness to its customers in 2009, which we
believe is likely, we would expect to see commensurate increases in our sales to
Inverness, as we believe that Inverness’ inventories have been substantially
reduced as compared to 2008.
Our
improved gross margin percentage, even after the fourth quarter 2008 royalty
expenses related to prior quarters, occurred as a result of continued cost and
efficiency improvements as well as improved product mix, primarily as a result
of lower unit production costs for components sold to
Brazil. Decreased SG&A costs were achieved through termination of
positions within these departments and reduction in other costs throughout this
cost area. Our net increase in Research & Development
expenses included our costs of completing the lowering of the age limit of our
FDA approved rapid HIV tests, as well as the cost of establishing a technical
department within R&D that can alternatively support operations, transfer
new products to operations, research process improvements, and to the extent
there is available capacity within this group, support traditional R&D
activities.
29
2009
Based
upon (1) the growing base of business we have in the United States for our two
FDA-approved CLIA-waived rapid HIV tests, resulting both from the expansion of
the market and from market share gains by our marketing partner Inverness
Medical; (2) continued growth opportunities for our rapid HIV test products
globally, and; (3) our expectation that 2009 will bring our first significant
revenues from our DPP® technology, primarily as a result of the contracts we
signed with the Oswaldo Cruz Foundation in 2008, we believe we are positioned
for increases in our revenues and improvement in our overall operating results
in 2009.
Our base
plan for 2009 assumes the following: (1) Growth in our sales to Inverness, as it
makes gains in hospital and public health markets and because inventory levels
that it brought into 2008 have been normalized, (2) conservative
assumptions with regard to our international HIV business, primarily
including a significant reduction from Nigeria, partially offset by expected
growth from our HIV business through new distribution opportunities in Asia,
Africa, South America and, upon receipt of our CE Mark, Europe, and (3)
successful execution for approval and sales of our DPP® products pursuant to the
contracts we signed with Oswaldo Cruz Foundation in 2008.
We intend
to continue improving our manufacturing efficiencies and controlling our
SG&A expenses, resulting in continued anticipated improvements in our
operating results. Even though we made significant cost reductions
during 2008, given the reduced sales from Nigeria, an extremely uncertain
economy, and the most challenging financing environment for debt or equity of
our time, during the first quarter of 2009 we made additional cost reductions in
all departments of the Company, including elimination of a number of salaried
positions and implementation of a company-wide pay reduction program for all
salaried employees earning at least $30,000, with appropriately larger
reductions for those earning higher amounts. During 2008 and 2009 year-to-date
we have also eliminated salaries in our sales and marketing and administrative
areas, which represented annualized costs in excess of $500,000, exclusive of
benefits and other attendant costs. Though this limits some new
business development opportunities, many of our new sales opportunities are
being developed either through OEM customer relationships, exclusive
distribution arrangements, and/or commissioned agents, all of which have enabled
us to reduce our sales and marketing costs significantly.
Research
& Development expenses in 2009 are budgeted as flat overall when compared
with 2008. However, based upon current and pending research and
development income from grants, development contracts and feasibility studies
(and associated staffing requirements for such commitments), our net R&D
cost in 2009 (R&D income less total R&D expense) should decrease
substantially as well. Having these external funds for R&D is
helping us to increase our experience and capabilities while limiting our cash
investment. Should pending contracts not materialize, we will make
commensurate adjustments to our Research & Development
expenses.
In
addition to the DPP® products we anticipate launching in Brazil through Oswaldo
Cruz Foundation this year, our contract development work for Bio-Rad
Laboratories, and several other research and development programs, our main DPP®
products that we are focusing our R&D activities on are our DPP® HIV 1/2
screening test for use with oral fluids and our DPP® Syphilis Screen
and Confirm test We are in discussions with a large in vitro
diagnostics marketing organization that, if an actual agreement is completed,
would fund all external regulatory costs, co-brand this product with our DPP®
trademark, and commit to minimum sales of the product in exchange for our
granting to it exclusive U.S. marketing rights to this product. We
are also actively pursuing opportunities for our oral fluid HIV test in the
international markets that we already participate in, as well as others, and we
are very encouraged by the interest we have received in this product
offering.
Equipment
Purchase Commitment:
In
January of 2009, the Company entered into an agreement with an equipment
manufacturer to design and build equipment that will be used to automate the
assembling of our tests and lower our production costs. The estimated
cost of $323,500 is being paid in installments.
30
Critical
Accounting Policies and Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
materially from those estimates.
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting
policies relate to revenue recognition, research and development costs,
valuation of inventory, valuation of long-lived assets and income
taxes. These policies, and the related procedures, are described in
detail below.
Revenue
Recognition –
We sell
our products directly through our sales force and through
distributors. Revenue from direct sales of our product are recognized
upon shipment to the customer. Income from research grants are
recognized in
earnings in the period in which the related expenditures are
incurred. Sales are recorded net of discounts, rebates and
returns.
Research
& Development Costs –
Research
and development activities consist primarily of new product development,
continuing engineering for existing products, regulatory and clinical trial
costs. Costs related to research and development efforts on existing
or potential products are expensed as incurred.
Valuation
of Inventories –
Inventories
are stated at the lower of cost or market, using the first-in, first-out method
(FIFO) to determine cost. Our policy is to periodically evaluate the
market value of the inventory and the stage of product life cycle, and record a
reserve for any inventory considered slow moving or
obsolete. For example, each additional 1% of obsolete
inventory would reduce such inventory by approximately $18,000.
Allowance
for doubtful accounts –
Our
policy is to review our accounts receivable on a periodic basis, no less than
monthly. On a quarterly basis an analysis is made of the adequacy of
our allowance for doubtful accounts and adjustments are made
accordingly. The current allowance is approximately .83% of
accounts receivable. For example each additional 1% of accounts
receivable that becomes uncollectible would reduce such balance of accounts
receivable by approximately $12,000.
Income Taxes –
Income
taxes are accounted for under FAS No. 109, “Accounting for Income
Taxes.” FAS No. 109 requires the asset and liability method of
accounting for deferred income taxes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities. Deferred tax
assets or liabilities at the end of each period are determined using the tax
rate expected to be in effect when taxes are actually paid or
recovered. For example, if we do not become profitable, we may be
unable to utilize our deferred tax asset, which approximates $8,598,000 at
December 31, 2008.
FAS 109
also requires that a valuation allowance be established when it is more likely
than not that all or a portion of a deferred tax asset will not be
realized. A review of all available positive and negative evidence
needs to be considered, including a company’s current and past performance, the
market environment in which the company operates, length of carryback and
carryforward periods and existing contracts that will result in future
profits.
Forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative objective evidence such as cumulative losses in recent
years. Cumulative losses weigh heavily in the overall
assessment. As a result, we determined that it was appropriate to
establish a valuation allowance for the full amount of our deferred tax
assets.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 prescribes
a comprehensive model for recognizing, measuring, presenting and disclosing in
the consolidated financial statements tax positions taken or expected to be
taken on a tax return, including a decision whether to file or not to file in a
particular jurisdiction.
The
calculation of our tax liabilities involves the inherent uncertainty associated
with the application of complex tax laws. We are subject to examination by
various taxing authorities. We believe that as a result of our losses sustained
to date, any examination would result in a reduction of our net operating losses
rather than a tax liability. As such, we have not provided for
additional taxes estimated under FIN 48, Accounting for Uncertainty in Income
Taxes.
The above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles, generally
accepted in the United States of America, with no need for management’s judgment
in their application. There are also areas in which management’s
judgment in selecting any viable alternative would not produce a materially
different result. See our audited financial statements and notes
thereto which contain accounting policies and other disclosures required by
accounting principles generally accepted in the United States of
America.
31
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
Consolidated Financial Statements and schedules that constitute Item 8 are
attached at the end of this Annual Report on Form 10-K. An index to
these Financial Statements and schedules is also included on page F-1 of this
Annual Report on Form 10-K.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
There
have been no disagreements, or transactions or events similar to those which
involved such disagreements or reportable events, with former accountants on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter disagreements in connection with any of its
reports.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
(a) Disclosure
Controls and Procedures. Under the supervision and with the
participation of our senior management, consisting of our chief executive
officer and our chief financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this report (the "Evaluation Date"). Based on that
evaluation, the Company’s management, including our chief executive officer and
chief financial officer, concluded that as of the Evaluation Date our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Our disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our Exchange Act reports is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Management's
Annual Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)). Our internal control over financial reporting is a
process, under the supervision of our chief executive officer and chief
financial officer, designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles in the United States. These internal controls over
financial reporting processes include policies and procedures that:
|
(1)
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
(2)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
(3)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.
32
In
evaluating the effectiveness of our internal control over financial reporting,
our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this evaluation, our management concluded that
our internal control over financial reporting was effective as of
December 31, 2008.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
(b) Changes
in Internal Control over Financial Reporting. There were no changes
in our internal control over financial reporting identified in connection with
the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the
Exchange Act that occurred during the Company’s last fiscal quarter of the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
ITEM
9B.
|
OTHER
INFORMATION
|
Not
applicable.
33
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
and Executive Officers
Lawrence A. Siebert (52), President, Chief Executive
Officer and Director. Mr. Siebert was appointed President of Chembio
Diagnostics, Inc. and a member of our board of directors upon consummation of
the merger. Mr. Siebert has been Chairman of Chembio Diagnostic
Systems Inc. for approximately thirteen years and it’s President since May
2002. Mr. Siebert’s background is in private equity and venture
capital investing. From 1982 to 1991, Mr. Siebert was associated with
Stanwich Partners, Inc, which during that period invested in middle market
manufacturing and distribution companies. From 1992 to 1999, Mr.
Siebert was an investment consultant and business broker with Siebert Capital
Corp. and Siebert Associates LLC, and was a principal investor in a privately
held test and measurement company which was sold in 2002. Mr. Siebert
received a JD from Case Western Reserve University School of Law in 1981 and a
BA with Distinction in Economics from the University of Connecticut in
1978.
Richard J. Larkin (52), Chief Financial
Officer. Mr. Larkin was appointed as Chief Financial Officer of
Chembio Diagnostics, Inc. upon consummation of the merger. Mr. Larkin
oversees our financial activities and information systems. Mr. Larkin
has been the Chief Financial Officer of Chembio Diagnostic Systems Inc. since
September 2003. Prior to joining Chembio Diagnostic Systems Inc., Mr.
Larkin served as CFO at Visual Technology Group from May 2000 to September
2003, and also led their consultancy program that provided hands-on expertise in
all aspects of financial service, including the initial assessment of client
financial reporting requirements within an Enterprise Resource
Planning (Manufacturing) environment through training and
implementation. Prior to joining VTG, he served as CFO at Protex
International Corporation from May 1987 to January 2000. Mr. Larkin
holds a BBA in Accounting from Dowling College and is a member of the
American Institute of Certified Public Accountants.
Javan Esfandiari (42), Executive VP of Research
and Development. Mr. Esfandiari joined Chembio Diagnostic Systems,
Inc, in 2000. Mr. Esfandiari co-founded, and became a co-owner of
Sinovus Biotech AB where he served as Director of Research and Development
concerning lateral flow technology until Chembio Diagnostic Systems Inc.
acquired Sinovus Biotech AB in 2000. From 1993 to 1997, Mr.
Esfandiari was Director of Research and Development with On-Site
Biotech/National Veterinary Institute, Uppsala, Sweden, which was working in
collaboration with Sinovus Biotech AB on development of veterinary lateral flow
technology. Mr. Esfandiari received his B.Sc. in Clinical Chemistry
and his M. Sc. in Molecular Biology from Lund University, Sweden. He
has published articles in various veterinary journals and has co-authored
articles on tuberculosis serology with Dr. Lyashchenko.
Richard Bruce (55), Vice President, Operations.
Mr. Bruce was hired in April 2000 as Director of Operations. He is responsible
for manufacturing, maintenance, inventory, shipping, receiving, and warehouse
operations. Prior to joining Chembio Diagnostic Systems Inc., he held
director level positions at Wyeth Laboratories from 1984 to 1993. From 1993
to 1998, he held various management positions in the Operations department
at Biomerieux. From 1998 to 2000, he held a management position at
V.I. Technologies. Mr. Bruce has over thirty years of operations
management experience with Fortune 500 companies in the field of in-vitro
diagnostics and blood fractionation. Mr. Bruce received his BS in
Management from National Louis University in 1997.
Tom Ippolito (46), VP of Regulatory Affairs,
QA and QC. Mr. Ippolito joined Chembio in June 2005. He has over
twenty years experience with in vitro diagnostics for infectious diseases,
protein therapeutics, vaccine development, Process Development, Regulatory
Affairs and Quality Management. Over the years, Mr. Ippolito has held Vice
President level positions at Biospecific Technologies, Corp. from 2000 - 2005,
Director level positions in Quality Assurance, Quality Control, Process
Development and Regulatory Affairs at United Biomedical, Inc. from 1987 - 2000.
Mr. Ippolito is the Course Director for “drug development process” and “FDA
Regulatory Process” for the BioScience Certificate Program at the New York State
University of Stony Brook, a program he has been a part of since its inception
in 2003.
Dr. Gary Meller (58), Director. Dr.
Meller was elected to our Board of Directors on March 15, 2005, and currently
serves on the Company’s Audit, Compensation and Nominating and Corporate
Governance Committees, including as Chairman of the Compensation
Committee. Dr. Meller has been the president of CommSense Inc., a
healthcare business development company, since 2001. CommSense Inc.
works with clients in Europe, Asia, North America, and the Middle East on
medical information technology, medical records, pharmaceutical product
development and financing, health services operations and strategy, and new
product and new market development. From 1999 until 2001 Dr. Meller
was the executive vice president, North America, of NextEd Ltd., a leading
internet educational services company in the Asia Pacific region. Dr.
Meller also is a limited partner and a member of the Advisory Board of
Crestview Capital Master LLC, which is our largest stockholder. Dr. Meller is a
graduate of the University of New Mexico School of Medicine and has an MBA from
the Harvard Business School.
34
Kathy Davis (52), Director. Ms.
Davis was elected to the Company’s Board of Directors in May 2007, and currently
serves on the Company’s Audit, Compensation and Nominating And Corporate
Governance Committees, including as Chairman of each of the Audit Committee and
the Nominating And Corporate Governance Committee. Ms. Davis is
presently the owner of Davis Design Group LLC, a company that provides
analytical and visual tools for public policy design. Previously she
served as the Chief Executive Officer of Global Access Point, a start up company
with products for data transport, data processing, and data storage network and
hub facilities. From October 2003 to January 2005, Ms. Davis was
Lieutenant Governor of the State of Indiana, and from January 2000 to October
2003 was Controller of the City of Indianapolis. From 1989 to 2003, Ms.
Davis held leadership positions with agencies and programs in the State of
Indiana including State Budget Director, Secretary of Family & Social
Services Administration, and Deputy Commissioner of Transportation. From 1982 to
1989 Ms. Davis held increasingly senior positions with Cummins Engine, where she
managed purchasing, product cost, manufacturing, engineering, and assembly of
certain engine product lines. Ms. Davis also led the startup of and
initial investments by a $50 million Indiana state technology fund, serves on
the not-for-profit boards of Noble of Indiana, Indiana Museum of African
American History, University of Evansville Institute of Global Enterprise, and
Purdue College of Science Dean’s Leadership Council. She has a Masters of
Business Administration from Harvard Business School and a Bachelor of
Science in Mechanical Engineering from the Massachusetts Institute of
Technology.
Section
16(a) Beneficial Ownership Reporting Compliances
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the Company’s directors, executive officers and beneficial owners of
more than 10% of the Company’s common stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the
Company. The Company believes that during the year ended December 31,
2008, each person who was an officer, director and beneficial owner of more than
10% of the Company’s common stock complied with all Section 16(a) filing
requirements, except for the following: (i) Form 4 for Former Director
James D. Merselis, due on March 24, 2008, was filed on March 25,
2008.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer, controller,
and persons performing similar functions. A copy of the Company’s
code of ethics is filed as Exhibit 14.1 to this Form 10-K.
Identification
of Audit Committee; Audit Committee Financial Expert
The
Company’s board of directors has established an audit
committee. Katherine L. Davis and Dr. Gary Meller each serves on the
audit committee, with Ms. Davis serving as chairman. The Company’s
board of directors has determined that Ms. Davis is an audit committee financial
expert and is independent.
35
ITEM
11. EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by the Company in each of
the last two completed fiscal years for our principal executive officer, our two
most highly compensated executive officers other than our principal executive
officer whose annual compensation exceeded $100,000, and two additional
individuals for whom disclosure would have been made in this table but for the
fact that the individual was not serving as an executive officer of our company
at December 31, 2008.
|
Name
/
Principal
Position
|
Year
|
Salary1
($)
|
Bonus2
($)
|
Option
Awards3
($)
|
Stock
Awards
($)
|
All
Other Compensation5
($)
|
Total
($)
|
|
Lawrence
A. Siebert4
|
2008
|
$265,000
|
$
26,000
|
$ 36,695
|
$ -
|
$ 8,267
|
$335,962
|
|
CEO
|
2007
|
243,135
|
26,000
|
-
|
-
|
9,314
|
278,448
|
|
Richard
J. Larkin
|
2008
|
$163,076
|
$
15,000
|
$ 12,193
|
$ -
|
$ 1,781
|
$192,050
|
|
CFO
|
2007
|
153,654
|
15,000
|
-
|
-
|
1,304
|
169,958
|
|
Javan
Esfandiari
|
2008
|
$215,692
|
$
16,000
|
$ 45,297
|
$ 28,702
|
$ 5,872
|
$311,564
|
|
VP-R&D
|
2007
|
171,192
|
21,000
|
99,993
|
89,850
|
5,510
|
387,546
|
|
Tom
Ippolito
|
2008
|
$173,631
|
$
12,000
|
$ 8,129
|
$ -
|
$ 1,708
|
$195,467
|
|
VP-Regulatory
|
2007
|
152,481
|
12,000
|
-
|
381
|
164,862
|
|
|
Richard
Bruce
|
2008
|
$151,923
|
$
12,000
|
$ 8,129
|
$ -
|
$ 933
|
$172,984
|
|
VP-Operations
|
2007
|
140,654
|
12,000
|
-
|
990
|
153,644
|
|
1 Salary
is total base salary.
2 Any
bonus earned was paid solely on a discretionary basis, and not pursuant to any
bonus plan.
3 The
estimated fair value of any option or common stock granted was determined at the
date of grant by using the Black-Scholes option pricing model.
4 Mr.
Siebert also serves as a director on the Company’s board of
directors. Mr. Siebert does not receive any compensation for this
director role.
5 Other
compensation includes an employer match to 401(K) contributions and car
allowances where applicable.
Employment
Agreements
Mr.
Siebert. Effective May 11, 2008, the Company’s Board of
Directors approved the Company’s extension of the June 15, 2006 employment
agreement (the “Employment Agreement”) with Lawrence A. Siebert, the Company’s
President and Chief Executive Officer, for an additional one-year
term. On June 15, 2006, Mr. Siebert and the Company entered into an
Employment Agreement, effective May 10, 2006, which was to terminate on May
10, 2008. Pursuant to the Employment Agreement, Mr. Siebert serves as
the President and Chief Executive Officer of the Company and received an initial
salary of $240,000 per year, which had been increased to $265,000 per year until
Mr. Siebert agreed to a 15 percent reduction, to $225,000, effective January 19,
2009. Mr. Siebert also is eligible for a bonus of up to 50% of his
salary, consisting of (i) a bonus of up to 25% of his salary that is at the
complete discretion and determination of the board of directors, and (ii) a
bonus of up to an additional 25% of his salary that will be determined based
upon revenue and earnings performance criteria established each year by the
board of directors. Mr. Siebert is eligible to participate in any
profit sharing, stock option, retirement plan, medical and/or hospitalization
plan, and/or other benefit plans except for disability and life insurance that
the Company may from time to time place in effect for the Company’s executives
during the term of Mr. Siebert’s employment agreement. If Mr.
Siebert’s Employment Agreement is terminated by the Company without cause, or if
Mr. Siebert terminates his Employment Agreement for a reasonable basis,
including within 12 months of a change in control, the Company is required to
pay as severance Mr. Siebert’s salary for six months. Mr. Siebert has
agreed for a period of two years after the termination of his employment with
the Company not to induce customers, agents, or other sources of distribution of
the Company’s business under contract or doing business with the Company to
terminate, reduce, alter, or divert business with or from the
Company. The terms of the extended May 1, 2008 Employment
Agreement are identical to the June 15, 2006 Employment Agreement, except that
under the extended Employment Agreement, Mr. Siebert received additional
consideration in the form of incentive stock options to purchase 250,000 shares
of the Company’s common stock exercisable at $0.13 per share, which was the
closing price of the Company's common stock on June 3, 2008. The
incentive stock options are immediately exercisable and they expire on the June
3, 2013.
36
Mr. Esfandiari. The
Company entered into an employment agreement dated April 23, 2007, and to be
effective March 5, 2007 (the "Employment Agreement"), with Mr. Esfandiari to
continue as the Company's Senior Vice President of Research and Development for
an additional term of three years. Mr. Esfandiari's salary under the
Employment Agreement is $185,000 for the first year, $210,000 for the second
year, and $235,000 for the final year. Mr. Esfandiari is eligible for
a cash bonus of up to 50% of his base salary for each respective year,
consisting of (i) a cash bonus of up to 37.5% of his calendar year base salary
based on the performance of the Company's Dual Path Platform Technology, which
is directly related to certain annual revenue targets budgeted by management of
the Company, and (ii) a cash bonus of up to 12.5% of his calendar year base
salary that is at the complete discretion and determination of the board of
directors. The Company also granted Mr. Esfandiari a stock grant of
200,000 shares of the Company's common stock. 100,000 shares vested when the
employment agreement was executed, 50,000 shares vested on the first anniversary
date of the Employment Agreement, and 50,000 shares vested on the second
anniversary of the Employment Agreement. In addition, although none were
granted, the Employment Agreement provided that Mr. Esfandiari could have been
granted up to 50,000 shares of the Company's common stock for 2007 and 2008
based upon the performance of the Company's Dual Path Platform Technology, which
is directly related to certain annual revenue targets budgeted by management of
the Company. Pursuant to the Company's 1999 Stock Option Plan, the
Company also granted Mr. Esfandiari incentive stock options to purchase 300,000
shares of the Company's common stock. The price per share of these options is
equal to the fair market value of the Company's common stock on April 23, 2007,
which is the date on which the Agreement was entered into. 100,000 shares of the
stock options vested when the employment agreement was executed, 100,000 shares
of the stock options vested on the first anniversary of the Employment
Agreement, and 100,000 shares of the stock options vested on the second
anniversary of the Employment Agreement. Mr. Esfandiari is eligible to
participate in any profit sharing, stock option, retirement plan, medical and/or
hospitalization plan, and/or other benefit plans except for disability and life
insurance that the Company may from time to time place in effect for the
Company’s executives during the term of Mr. Esfandiari’s employment
agreement. If Mr. Esfandiari’s employment agreement is terminated by
the Company without cause, or if Mr. Esfandiari terminates his employment
agreement for a reasonable basis, as defined in the Employment Agreement
including within 12 months of a change in control, the Company is required to
pay as severance Mr. Esfandiari’s salary for twelve months.
Neither
Mr. Larkin, Mr. Ippolito nor Mr. Bruce has an employment contract with the
Company.
37
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2008
|
Option
Awards
|
Stock
Awards
|
||||||||
|
Name
|
Number
of Securities Underlying Unexcercised Options Excerciseable
(#)
|
Number
of Securities Underlying Unexcercised Options Unexcersable
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Option
Vesting Date
|
Number
of Shares of Stock That Have Not Vest
(#)
|
Market
Value of Shares of Stock That Have Not Vested
($)
|
Foot-
note
|
|
|
Lawrence
A. Siebert
|
250,000
|
0.13
|
6/3/2013
|
6/3/2008
|
3
|
||||
|
75,000
|
0.22
|
2/15/2013
|
2/15/2008
|
1
|
|||||
|
10,000
|
0.48
|
12/31/2008
|
4/17/2006
|
2
|
|||||
|
10,000
|
0.48
|
5/4/2011
|
4/17/2006
|
2,
5
|
|||||
|
50,000
|
0.48
|
5/28/2011
|
4/17/2006
|
2,
3, 5
|
|||||
|
50,000
|
0.48
|
5/28/2011
|
1/1/2007
|
2,
3, 5
|
|||||
|
50,000
|
0.48
|
5/4/2011
|
5/5/2004
|
2,
5
|
|||||
|
Richard
J. Larkin
|
75,000
|
0.22
|
2/15/2013
|
2/15/2008
|
1
|
||||
|
25,000
|
0.48
|
5/17/2010
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/17/2010
|
1/1/2007
|
2,
5
|
|||||
|
18,750
|
0.48
|
3/24/2011
|
3/24/2006
|
2,
5
|
|||||
|
18,750
|
0.48
|
3/24/2011
|
1/1/2007
|
2,
5
|
|||||
|
50,000
|
0.45
|
9/15/2010
|
5/5/2004
|
4
|
|||||
|
Javan
Esfandiari
|
60,000
|
0.22
|
2/15/2013
|
2/15/2008
|
1
|
||||
|
5,000
|
0.48
|
12/31/2008
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/17/2010
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/17/2010
|
1/1/2007
|
2,
5
|
|||||
|
18,750
|
0.48
|
3/24/2011
|
3/24/2006
|
2,
5
|
|||||
|
18,750
|
0.48
|
3/24/2011
|
1/1/2007
|
2,
5
|
|||||
|
5,000
|
0.48
|
5/4/2011
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/28/2011
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/28/2011
|
4/17/2006
|
2,
5
|
|||||
|
25,000
|
0.48
|
5/28/2011
|
5/28/2007
|
2,
5
|
|||||
|
30,000
|
0.48
|
5/4/2011
|
5/5/2004
|
2,
5
|
|||||
|
100,000
|
0.48
|
4/23/2012
|
4/23/2007
|
2,
3, 5
|
|||||
|
100,000
|
0.48
|
4/23/2012
|
3/5/2008
|
2,
3, 5
|
|||||
|
100,000
|
0.48
|
4/23/2012
|
3/5/2009
|
2,
3, 5
|
|||||
|
50,000
|
5,500
|
6
|
|||||||
|
Tom
Ippolito
|
50,000
|
0.22
|
2/15/2013
|
2/15/2008
|
2
|
||||
|
15,000
|
0.48
|
3/24/2011
|
3/24/2006
|
2,
5
|
|||||
|
Richard
Bruce
|
50,000
|
0.22
|
2/15/2013
|
2/15/2008
|
2
|
||||
|
5,000
|
0.48
|
12/31/2008
|
4/17/2006
|
2,
5
|
|||||
|
12,500
|
0.48
|
5/17/2010
|
4/17/2006
|
2,
5
|
|||||
|
12,500
|
0.48
|
5/17/2010
|
1/1/2007
|
2,
5
|
|||||
|
12,500
|
0.48
|
3/24/2011
|
3/24/2006
|
2,
5
|
|||||
|
12,500
|
0.48
|
3/24/2011
|
1/1/2007
|
2,
5
|
|||||
|
5,000
|
0.48
|
5/4/2011
|
4/17/2006
|
2,
5
|
|||||
|
10,000
|
0.48
|
5/4/2011
|
5/5/2004
|
2,
5
|
|||||
|
20,000
|
0.48
|
5/4/2011
|
5/5/2004
|
2,
5
|
|||||
38
1 All
options issued with a $.62 exercise price were issued during 2006 as part of the
Company’s 1999 Stock Option Plan. Pursuant to this plan, the Company
granted 244,000 options to all employees.
2 All
options issued with a $.75 exercise price and an April 17, 2006 vesting date
were issued on April 17, 2006 as part of the Company’s 1999 Stock Option
Plan. Pursuant to this plan, the Company granted 244,000 options to
all employees. On April 17, 2006, the Company’s Compensation
Committee approved the cancellation of each employee stock option award issued
under the 1999 Stock Option Plan where the exercise price was greater than $0.75
per share of the Company’s common stock, and the issuance of a new stock option
award under the 1999 Stock Option Plan, for the same number of shares of the
Company’s common stock, with an exercise price of $0.75 per share of the
Company’s common stock for each cancelled stock option award. The market price
of the common stock of the Company on April 17, 2006 was $0.72 per share. In
total, stock option awards to acquire 795,000 shares of Company common stock
were cancelled, and stock option awards to acquire 795,000 shares of Company
common stock were issued. Other than the change in the exercise price, all of
the terms and conditions in each newly issued stock option award are identical
to the cancelled stock option award it replaced, with the following exceptions:
(i) Lawrence A. Siebert’s stock option award for 50,000 shares of the Company’s
common stock, exercisable on May 28, 2006 and terminating on May 28, 2011, was
replaced with a stock option award for 50,000 shares of the Company’s common
stock, exercisable on January 1, 2007 and terminating on May 28, 2011;(ii) Avi
Pelossof’s stock option awards for 72,500 shares of the Company’s common stock,
exercisable on May 28, 2005 and on May 28, 2006 and both terminating on May 28,
2011 was replaced with a stock option award for 72,500 shares of the Company’s
common stock, exercisable on January 1, 2007 and terminating on May 28,
2011.
3 Options
issued in connection with an employment contract and under the 2008 Stock Incentive
Plan.
4 All
other options shown were issued prior to 2006 as part of the Company's 1999
Stock Option Plan.
5 On February 15, 2008, the Company’s
Compensation Committee approved the reduction of the exercise price to $0.48 per
share of each employee stock option award issued under the 1999 Stock Option
Plan for which the exercise price was greater than $0.48 per share.
6 Stock issued in
connection with an employment contract and under the 2008 Stock Incentive
Plan.
DIRECTOR
COMPENSATION
|
Name
|
Fees
Earned or Paid in Cash
($) 1
|
Option
Awards
($) 2
|
Total
($)
|
|||||||||
|
Katherine
L. Davis
|
$ | 25,750 | $ | 22,987 | $ | 48,737 | ||||||
|
Gary
Meller
|
24,250 | 23,316 | 47,566 | |||||||||
|
James
D. Merselis3
|
20,500 | 7,816 | 28,316 | |||||||||
|
Al
Carus4
|
14,750 | 23,635 | 38,385 | |||||||||
1 Fees earned or paid in
cash represents an annual retainer and fees for meeting expenses: (a) Mr.
Carus received $9,000 in an annual retainer for the portion of the year that he
served as a member of the board of directors, a $1,250 annual retainer as audit
committee chairman and $4,500 in meeting fees paid during 2008; (b) Mr. Merselis
received an $18,000 annual retainer as a member of the board of
directors, and $2,500 in meeting fees paid during 2008; (c) Dr. Meller received
an $18,000 annual retainer as a member of the board of directors, and $6,250 in
meeting fees; (d) Ms. Davis received an $18,000 annual retainer as a member of
the board of directors, a $1,250 retainer as audit committee chairman
and $6,500 in meeting fees.
2 Each outside member of the board of
directors is granted an option to purchase 180,000 shares of the company’s
common stock with an exercise price equal to the market price on the date of the
grant as part of their annual compensation. One-fifth of these options are
exercisable on the date of grant, one-fifth become exercisable on the first
anniversary of the date of grant, and additional one-fifths become exercisable
on the second through fourth anniversary of the date of grant. The
fair value of options at the date of grant was estimated using the Black-Scholes
option pricing model.
3 Mr. Merselis resigned from
our Board of Directors on February 9, 2009.
4 Mr. Carus resigned from our Board of
Directors on July 20, 2008.
Director
Compensation
All
non-employee directors are paid an $18,000 annual retainer, semi-annually, and
once every five years stock options to acquire 180,000 shares of the Company's
common stock, with an exercise price equal to the market price on the date of
the grant. Stock options to acquire 36,000 shares become exercisable
on the date of grant, and options to acquire an additional 36,000 shares become
exercisable on the date of each of the four succeeding annual meetings of
stockholders if and to the extent that the non-employee director is reelected as
a director at each such annual meeting. The audit committee chairman
is paid an annual retainer of $2,500, paid semi-annually. In
addition, the non-employee directors are paid $1,000 in cash for each board of
directors' meeting attended, and paid $500 in cash for each telephonic board of
directors meeting. The non-employee directors who are members of a
committee of the board of directors are paid $500 in cash for each committee
meeting attended, or $750 in cash for each committee meeting attended if that
non-employee director is the committee chairman.
39
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth certain information regarding the beneficial
ownership of our common stock by each person or entity known by us to be the
beneficial owner of more than 5% of the outstanding shares of common stock, each
of our directors and each of our “named executive officers” and all of our
directors and executive officers as a group as of March 17, 2009.
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
||||||
|
Siebert,
Lawrence (1)
3661
Horseblock Road
Medford,
NY 11763
|
6,933,615 | 11.11 | % | |||||
|
Esfandiari,
Javan (2)
3661
Horseblock Road
Medford,
NY 11763
|
779,580 | 1.25 | % | |||||
|
Larkin,
Richard (3)
3661
Horseblock Road
Medford,
NY 11763
|
267,672 | 0.43 | % | |||||
|
Ippolito,
Tom (4)
3661
Horseblock Road
Medford,
NY 11763
|
65,000 | 0.10 | % | |||||
|
Bruce,
Richard (5)
3661
Horseblock Road
Medford,
NY 11763
|
135,075 | 0.22 | % | |||||
|
Meller,
Gary (6)
3661
Horseblock Road
Medford,
NY 11763
|
354,300 | 0.57 | % | |||||
|
Davis,
Katherine L. (7)
3661
Horseblock Road
Medford,
NY 11763
|
75,650 | 0.12 | % | |||||
|
GROUP (8)
|
8,610,892 | 13.53 | % | |||||
|
Vicis
Capital Master Fund
126
East 56th Street, Tower 56, Suite 700
New
York, NY 10022
|
4,608,707 | 7.44 | % | |||||
|
Millenium
3 Opportunity Fund, LLC (9)
4
Becker Farm Road
Roseland,
NJ 07068
|
4,006,610 | 6.31 | % | |||||
|
Inverness
Medical Innovations, Inc.
51
Sawyer Road, Suite 200
Waltham,
MA 02453
|
5,367,840 | 8.67 | % | |||||
|
Crestview
Capital Master, LLC
95
Revere Drive, Suite A
Northbrook,
IL 60062
|
18,907,432 | 30.52 | % | |||||
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the Securities
Exchange Act of 1934, as amended, and generally includes voting or investment
power with respect to securities. Except as subject to community
property laws, where applicable, the person named above has sole voting and
investment power with respect to all shares of our common stock shown as
beneficially owned by him.
The
beneficial ownership percent in the table is calculated with respect to the
number of outstanding shares (61,944,901) of the Company's common stock
outstanding as of March 17, 2009. Each stockholder's ownership is
calculated as the number of shares of common stock owned plus the number of
shares of common stock into which any preferred stock, warrants, options or
other convertible securities owned by that stockholder can be converted within
60 days.
40
The term
“named executive officer” refers to our principal executive officer, our two
most highly compensated executive officers other than the principal executive
officer who were serving as executive officers at the end of 2008, and two
additional individuals for whom disclosure would have been provided but for the
fact that the individuals were not serving as executive officers of the Company
at the end of 2008.
|
|
(1)
|
Includes
495,000 shares issuable upon exercise of options exercisable within 60
days.
|
|
|
(2)
|
Includes
562,500 shares issuable upon exercise of options exercisable within 60
days and 2,007 shares issuable upon exercise of
warrants.
|
|
|
(3)
|
Includes
212,500 shares issuable upon exercise of options exercisable within 60
days.
|
|
|
(4)
|
Includes
65,000 shares issuable upon exercise of options exercisable within 60
days.
|
|
|
(5)
|
Includes
140,000 shares issuable upon exercise of options exercisable within 60
days.
|
|
|
(6)
|
Includes
159,000 shares issuable upon exercise of options exercisable within 60
days. Does not include 108,000 shares issuable upon exercise of
options that are not exercisable within the next 60
days.
|
|
|
(7)
|
Includes
75,650 shares issuable upon exercise of options exercisable within 60
days. Does not include 108,000 shares issuable upon exercise of options
that are not exercisable within the next 60
days.
|
|
|
(8)
|
Includes
footnotes (1)-(8)
|
|
|
(9)
|
Includes
1,557,376 shares issuable upon exercise of
warrants.
|
Equity
Compensation Plan Information
|
Combined
Equity Compensation Plans - Information as of December 31,
2008
|
|||
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans approved by security holders1
|
2,416,650
|
$0.366
|
4,566,350
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
2,416,650
|
$0.366
|
4,566,350
|
1 The
“Number of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants and Rights” represents 1,983,000 from the 1999 Stock Option Plan and
433,650 under the 2008 Stock Incentive Plan. The “Number of
Securities Remaining Available for Future Issuance under Equity Compensation
Plans” includes shares issuable under the 2008 Stock Incentive
Plan. The Company currently has no intention to issue additional
securities under the 1999 Stock
Option Plan.
41
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The
executive officers of the Company are as follows: Lawrence A. Siebert, president
and chairman of the board of directors of the Company, Richard J. Larkin, chief
financial officer of the Company, and Javan Esfandiari, executive vice president
of Research and Development of the Company.
On
February 15, 2008, the Compensation Committee approved the reduction of the
exercise price to $0.48 per share of each employee stock option award issued
under the 1999 Stock Option Plan for which the exercise price was greater than
$0.48 per share. As a result of this price reduction, the following
number of employee stock options owned by the Company’s officers and directors
at that time under the 1999 Stock Option Plan qualified for this price
reduction: (i) Mr. Siebert: 170,000 options; (ii) Mr. Larkin: 87,500 options;
(iii) Mr. Esfandiari: 532,500 options; (iv) Mr. Aromando: 100,000 options; (v)
Mr. Ippolito: 15,000 options; (vi) Mr. Bruce: 90,000 options; (vii) Mr. Carus:
252,000 options; (viii) Dr. Meller: 252,000 options; and (ix) Ms. Davis: 180,000
options.
In
addition, on February 15, 2008 the Compensation Committee granted, to certain of
the Company’s existing officers at that time options to purchase the Company’s
common stock under the 1999 Stock Option Plan as follows: (i) Mr. Siebert,
75,000 options; (ii) Mr. Larkin, 75,000 options; (iii) Mr. Esfandiari, 60,000
options; (iv) Mr. Bruce, 50,000 options; (v) Mr. Ippolito, 50,000 options; and
(vi) Mr. Aromando, 25,000 options. The exercise price for each of
these options is $0.22 per share, which was the closing market price for the
Company’s common stock on February 15, 2008. The options vest on the
date of the grant, and each option granted will expire and terminate, if not
exercised sooner, upon the earlier to occur of (a) 30 days after termination of
the employee’s employment with the Company or (b) the fifth anniversary of the
date of grant.
Avi
Pelossof, the Company’s Vice President of Sales and Marketing from May 5, 2004
to January 31, 2007, exercised 100,000 options in December 2006 at $0.60 per
share, and another 50,000 options in January 2007 at $0.75 per
share.
Robert
Aromando, the Company’s Executive Vice President of Commercial Operations was
hired in May of 2007. In June 2007 in connection with his joining the
Company, he was granted options to purchase 100,000 shares of common stock at an
exercise price of $0.62 per share. These options will become
exercisable one year from the date of grant. As discussed above, on
February 15, 2008, the exercise price for these options was reduced to
$0.48. Mr. Aromando left the employ of the Company in August 2008 and
since then his options have expired.
Dr. Gary Meller, a non-employee
director of the Company, currently serves as a limited partner and a member of
the Advisory Board of Crestview Capital Master LLC, referred to herein as
Crestview, which was the lead investor, investing $3 million, in our Series B
Preferred Stock private placement in January 2005, and which subsequently
invested an additional $1 million in our Series B Preferred Stock private
placement in March 2006. Crestview also invested $2 million in our
Series C Preferred Stock private placement in September 2006. Details
of these transactions are set forth below. Crestview currently is the largest
stockholder of the Company, with beneficial ownership of approximately 30.5
percent of our common stock.
As
referred to above, in January 2005, for a purchase price of $3 million,
Crestview acquired 60 shares of our Series B Preferred Stock, and warrants to
purchase 4,672,130 shares of our common stock at a warrant exercise price of
$0.61 per share. As described below, in December 2007, these shares
of Preferred Stock and warrants were exchanged for shares of the Company’s
common stock.
In March
2006, for a purchase price of $1 million, Crestview acquired 20 shares of Series
B Preferred Stock with warrants to purchase 1,557,377 shares of common stock at
a warrant exercise price of $0.61 per share. These shares were issued
in connection with the Company’s January 2005 private placement as described
herein. In September 2006, for a purchase price of $2 million, we
issued 40 shares of Series C Preferred Stock to Crestview together with warrants
to purchase 625,000 shares of common stock at an exercise price of $1.00 per
share.
In
January 2007, because of comments from the staff of the SEC concerning the
Company’s registration statement No. 333-138266 (the “Prospectus”), Crestview
agreed to reduce the number of its shares of common stock covered by the
Prospectus to 2,000,000. Crestview also agreed to waive any penalties
that the Company would otherwise owe Crestview because of the failure to
register all of Crestview’s shares in the Prospectus. In
consideration for this waiver, the Company agreed that, upon request by
Crestview, the Company will file one or more registration statements with the
SEC in order to register the resale of other shares beneficially owned by
Crestview. The cost of any such registration statements shall be
borne by the Company.
In
addition to Crestview’s $2,000,000 investment in the Company’s September 2006
private placement of Series C Preferred Stock, the Company also received an
investment of $2,000,000 on that date from Inverness Medical Innovations, Inc.
(“Inverness”). At that time, a Certificate of Designation for the
Series C Preferred Stock was filed with the Secretary of State of Nevada
reflecting the agreed upon conversion price of $0.85 per share of common
stock. This private placement of Series C Preferred Stock was
completed on October 5, 2006, and it raised an aggregate of $8,150,000
(including the $2,000,000 invested by each of Crestview and
Inverness). During the period between September 29, 2006 and October
5, 2006, we requested the assistance of Crestview and others in identifying
prospective investors for us.
42
On
December 19, 2007 (the “Closing Date”), amendments to the governing documents
for the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”), not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”), were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants. Subsequent to these amendments, all shares of Preferred
Stock were converted to common stock and certain of the Non-Employee Warrants
were exercised, including the following: Mr. Siebert’s 38.74442 shares of Series
A Preferred Stock were converted into 2,421,526 shares of common stock at $0.48
per share, his 1.08545 shares of Series B Preferred Stock were converted into
113,067 shares of common stock at $0.48 per share, and Mr. Siebert purchased
337,500 shares of common stock through the exercise of warrants at an exercise
price of $0.40 per share, for a total of $135,000 in cash; Mr. Larkin on
December 19, 2007 pursuant to the Plan converted .50392 shares of his Series A
Preferred Stock into 37,794 shares of common stock at $.40 per share, in
addition he received 369 shares of common stock as payment of dividends on the
series A preferred. He also received 3,050 shares of common stock in
the exercise of warrants pursuant to the Plan at $.40 per share, or a total of
$1,220 in cash, Inverness’ 40 shares of Series C Preferred Stock were converted
into 4,166,666 shares of common stock, and Inverness exercised all of
its Series C Warrants to purchase a total of 625,000 shares of common stock for
an aggregate purchase price of $250,000 and Crestview’s 82.32274 shares of
Series B Preferred Stock were converted into 10,290,342 shares of the
Company’s common stock, Crestview’s 40 shares of Series C Preferred Stock were
converted into 4,166,666 shares of common stock, Crestview exercised a portion
of its Series B Warrants to purchase a total of 60,451 shares of common stock
for an aggregate purchase price of $24,180.40, and Crestview exercised all of
its Series C Warrants to purchase a total of 625,000 shares of common stock for
an aggregate purchase price of $250,000.
In June
2008, pursuant to the Plan (see above), Mr. Siebert, exercised 2,205,731
warrants, on a cashless basis, into 332,940 shares of common stock, Mr. Larkin
exercised 27,436 warrants, on a cashless basis, into 4,141 shares of common
stock, and Crestview exercised 6,169,055 warrants, on a cashless basis, into
931,177 shares of common stock.
During
the quarter ended December 31, 2008, Inverness notified the Company that
Inverness had entered into a contract with Bio-Rad Laboratories, Inc.
(“Bio-Rad”) for royalties on Bio-Rad’s patent for the detection of HIV-2
antibodies. The agreement also provided for Inverness to pay past
royalties. The agreements between the Company and Inverness provide
that the Company is to share in this expense and as such Inverness requested it
be reimbursed for the Company’s share of past royalties. The Company
negotiated with Inverness that this liability is to be paid from future revenues
over approximately the next 18 months. In addition Inverness agreed
to allow Chembio to pay its royalty obligation to Inverness on Chembio’s sales
to third parties in the same way and over the same period.
Director
Independence
Our
common stock trades on the OTC Bulletin Board. As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent.
We are not currently subject to
corporate governance standards defining the independence of our directors, and
we have chosen to define an “independent” director in accordance with the NASDAQ
Global Market's requirements for independent directors (NASDAQ Marketplace Rule
4200). Under this definition, we have determined that Katherine L.
Davis currently qualifies as independent director. We do not list the
“independent” definition we use on our Internet website.
43
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
All
fees discussed below were paid to Lazar Levine & Felix
LLP. Remaining fees for the December 31, 2008 audit will be paid in
2009 to Parente Randolph, LLC. In February 2009, Lazar Levine &
Felix LLP merged its practice into Parente Randolph, LLC.
Audit
Fees
For the
years ended December 31, 2008 and 2007, the Company’s independent
accounting firm, billed the Company $136,000 and $119,000, respectively, for
fees for the audit of the Company’s annual financial statements and review of
financial statements included in the Company’s Forms 10-Q and 10-K.
Audit-Related
Fees
For the
years ended December 31, 2008 and 2007, the independent accounting firm, did not
provide the Company with any assurance and related services reasonably related
to the performance of the audit or review of the Company’s financial statements
that are not reported above under “Audit Fees.”
Tax
Fees
For the
years ended December 31, 2008 and 2007, the independent accounting firm billed
the Company $13,500 and $10,000, respectively, for professional services for tax
compliance, tax advice and tax planning.
All
Other Fees
For the
years ended December 31, 2008 and 2007, the independent accounting firm billed
the Company $2,500 and $8,500 for fees associated with the preparation and
filing of the Company’s registration statements, responses to SEC comment
letters and other related matters.
Audit
Committee Pre-Approval Policies
The Audit
Committee (and prior to the adoption of the Audit Committee, the Board of
Directors) approves in advance all audit and non-audit services performed by the
independent accounting firm. There are no other specific policies or
procedures relating to the pre-approval of services performed by the independent
accounting firm.
As
disclosed in the Company's Amendment No. 2 to Form 8-K/A filed with the SEC on
March 3, 2009, on February 15, 2009, the practice of Lazar Levine & Felix
LLP was acquired by Parente Randolph, LLC (“Parente”) in a transaction pursuant
to which Lazar merged its operations into Parente and certain of the
professional staff and principals of Lazar joined Parente either as employees or
partners of Parente. On February 19, 2009, as a result of this
transaction, Lazar resigned from its role as principal auditor of the Company’s
financial statements. The Company, through and with the approval of
the Audit Committee of the Company’s Board of Directors, engaged Parente as its
independent registered public accounting firm.
Lazar’s
reports regarding the Company’s financial statements for the fiscal years ended
December 31, 2007 and 2006 did not contain any adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the years ended December 31, 2008 and
2007, and during the interim period from the end of the most recently completed
fiscal year through February 19, 2009, the date of resignation, there were no
disagreements with Lazar on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Lazar would have caused it
to make reference to such disagreement in its reports.
During
the years ended December 31, 2008 and 2007, and during the interim period from
the end of the most recently completed fiscal year through February 19, 2009,
the date of engagement, the Company did not consult with Parente regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinions that might be rendered by
Parente on the Company’s financial statements. Parente did not
provide the Company a written report or any oral advice that was an important
factor considered by the Company in reaching a decision as to any accounting,
auditing or financial reporting issue.
In
addition, during the years ended December 31, 2008 and 2007, and during the
interim period from the end of the most recently completed fiscal year through
February 19, 2009, the date of engagement, the Company did not consult with
Parente on any matter that was either the subject of a disagreement (as defined
in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to this
item) or a reportable event (as described in Item304(a)(1)(v) of Regulation
S-K). As such none of the required disclosures under Item
304(a)(2)(ii) apply.
44
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
Number Description &
#160;
|
3.1
|
Articles
of Incorporation, as amended. (3)
|
|
3.2
|
Amended
and Restated Bylaws. (1)
|
|
4.2
|
Registration
Rights Agreement, dated as of May 5, 2004, by and among the Registrant and
the Purchasers listed therein. (2)
|
|
4.4
|
Amended
Form of Common Stock Warrant issued pursuant to the May 4, 2004 Stock and
Warrant Purchase Agreement. (16)
|
|
4.5
|
Form
of $0.90 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated as of May 5, 2004 between the Registrant and Mark L. Baum.
(2)
|
|
4.6
|
Form
of $0.60 Warrant issued to Mark L. Baum pursuant to the Consulting
Agreement dated as of May 5, 2004 between the Registrant and Mark L. Baum.
(2)
|
|
4.8
|
Form
of Common Stock Warrant issued pursuant to the January 26, 2005 Securities
Purchase Agreement. (9)
|
|
4.9
|
Amended
Form of Common Stock Warrant issued pursuant to the January 26, 2005
Securities Purchase Agreement. (16)
|
|
4.10
|
Registration
Rights Agreement, dated as of January 26, 2005, by and among the
Registrant and the purchasers listed therein.
(9)
|
|
4.11
|
Form
of Warrant, dated June 29, 2006, issued pursuant to Company and purchasers
of the Company’s Secured
Debentures. (4)
|
|
4.12
|
Registration
Rights Agreement, dated June 29, 2006.
(4)
|
|
4.14
|
Registration
Rights Agreement, dated as of September 29, 2006, by and among the
Registrant and the Purchasers listed therein.
(6)
|
|
4.15
|
Form
of Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated September 29, 2006
(6).
|
|
4.16
|
Amended
Form of Common Stock Warrant issued pursuant to the Securities Purchase
Agreements dated October 5, 2006.
(16)
|
|
4.17
|
Amended
Form of Common Stock Warrant issued to Placement Agents pursuant to the
October 5, 2005 Securities Purchase Agreement.
(16)
|
|
4.18*
|
Form
of Employee Option Agreement. (16)
|
|
4.19
|
Amended
Form of Warrant used for Consultant Services, and in connection with the
Company’s 2004 merger. (16)
|
|
4.20
|
1999
Equity Incentive Plan. (14)
|
|
4.20
|
2008
Stock Incentive Plan. (15)
|
|
10.1*
|
Employment
Agreement dated June 15, 2006 with Lawrence A. Siebert.
(5)
|
|
10.2*
|
Employment
Agreement dated April 23, 2007 with Javan Esfandiari.
(13)
|
|
10.3
|
Series
A Convertible Preferred Stock and Warrant Purchase Agreement (the “Stock
and Warrant Purchase Agreement”), dated as of May 5, 2004, by and among
the Registrant and the purchasers listed therein.
(2)
|
|
10.4
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
January 26, 2005, by and among the Registrant and the purchasers listed
therein. (9)
|
|
10.5
|
Amendment
No. 1 to Securities Purchase Agreement, dated as of January 28, 2005 by
and among the Registrant and the purchasers listed therein.
(10)
|
|
10.7
|
Security
Purchase Agreement, dated June 29, 2006, among the Company and purchasers
of the Company’s Secured Debentures.
(4)
|
|
10.11
|
Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of
September 29, 2006, by and among the Registrant and the Purchasers listed
therein. (6)
|
|
10.12
|
Letter
of Amendment to Securities Purchase Agreements dated as of September 29,
2006 by and among the Registrant and the Purchasers listed therein.
(6)
|
|
10.13
|
HIV
Barrel License, Marketing and Distribution Agreement, dated as of
September 29, 2006, by and among the Registrant, Inverness and StatSure.
(6)
|
|
10.14
|
HIV
Cassette License, Marketing and Distribution Agreement, dated as of
September 29, 2006, between the Registrant and Inverness.
(6)
|
|
10.15
|
Non-Exclusive
License, Marketing and Distribution Agreement, dated as of September 29,
2006, between the Registrant and Inverness.
(6)
|
|
10.16
|
Joint
HIV Barrel Product Commercialization Agreement, dated as of September 29,
2006, between the Registrant and StatSure.
(6)
|
|
10.19
|
License
and Supply Agreement dated as of August 30, 2002 by and between Chembio
Diagnostic Systems Inc. and Adaltis Inc.
(8)
|
|
14.1
|
Ethics
Policy (11)
|
|
21
|
List
of Subsidiaries.
|
|
23.1
|
Consent
of Parente Randolph LLC, Independent
Accountants.
|
|
23.2
|
Consent
of Lazar Levine & Felix LLP, Independent
Accountants.
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
45
|
(1)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on August 23, 1999 and the Registrant’s Form 8-K
filed on December 20, 2007.
|
|
(2)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on May 14, 2004.
|
|
(3)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 31, 2005.
|
|
(4)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on July 3, 2006.
|
|
(5)
|
Incorporated
by reference to the Registrant’s Current Reports on Form 8-K filed with
the Commission on June 21, 2006 and June 5,
2008.
|
|
(6)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on October 5, 2006.
|
|
(7)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2/A
filed with the Commission on August 4,
2004.
|
|
(8)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on June 7,
2004.
|
|
(9)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on January 31, 2005.
|
|
(10)
|
Incorporated
by reference to the Registrant’s registration statement on Form SB-2 filed
with the Commission on March 28,
2005.
|
|
(11)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-KSB filed with
the Commission on March 30, 2006.
|
|
(12)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Commission on January 30, 2007.
|
|
(13)
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K/A filed with
the Commission on May 3, 2007.
|
|
(14)
|
Incorporated
by reference to the Registrant’s definitive proxy statement on Schedule
14A filed with the Commission on May 11,
2005.
|
|
(15)
|
Incorporated
by reference to the Registrant’s definitive proxy statement on Schedule
14A filed with the Commission on April 14,
2008.
|
| (16) | Incorporated by reference to the Registrant’s annual report on Form 10-KSB filed with the Commission on March 12, 2008. |
|
(*)
|
An
asterisk (*) beside an exhibit number indicates the exhibit contains a
management contract, compensatory plan or arrangement which is required to
be identified in this report.
|
46
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHEMBIO DIAGNOSTICS,
INC.
Date: March
18,
2009 By
/s/ Lawrence A.
Siebert
Lawrence
A. Siebert
President,
Chief Executive Officer and
Chairman
of the Board
In
accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signatures
|
Title
|
Date
|
|
/s/ Lawrence A.
Siebert
Lawrence
A. Siebert
|
Chief
Executive Officer, President and Chairman Of The Board
(Principal
Executive Officer)
|
March
18, 2009
|
|
/s/ Richard J.
Larkin
Richard
J. Larkin
|
Chief
Financial Officer (Principal Financial & Accounting
Officer)
|
March
18, 2009
|
|
/s/ Gary
Meller
Dr.
Gary Meller
|
Director
|
March
18, 2009
|
|
/s/ Katherine L.
Davis
Katherine
L. Davis
|
Director
|
March
18, 2009
|
47
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
|
|
Index to Consolidated
Financial Statements
|
|
|
—INDEX—
|
|
|
Page(s)
|
|
|
Report
of Registered Independent Public Accounting Firm -
Successor
|
F-2
|
|
Report
of Registered Independent Public Accounting Firm -
Predecessor
|
F-3
|
|
Consolidated
Financial Statements:
|
|
|
Balance
Sheets
|
|
|
December
31, 2008 and 2007
|
F-4
|
|
Statements
of Operations
|
|
|
Years
ended December 31, 2008 and 2007
|
F-5
|
|
Statements
of Changes in Stockholders’ Equity
|
|
|
Years
ended December 31, 2008 and 2007
|
F-6
|
|
Statements
of Cash Flows
|
|
|
Years
ended December 31, 2008 and 2007
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-23
|
F -
1
REPORT OF REGISTERED
INDEPENDENT PUBLIC ACCOUNTING FIRM
To The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiaries
Medford,
New York
We have
audited the consolidated balance sheet of Chembio Diagnostics, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 2008. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Chembio Diagnostics,
Inc. and Subsidiaries as of December 31, 2008, and the consolidated results of
its operations and its cash flows for the year ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
PARENTE
RANDOLPH, LLC
/s/ PARENTE RANDOLPH,
LLC
New York,
New York
March 18,
2009
F -
2
REPORT OF REGISTERED
INDEPENDENT PUBLIC ACCOUNTING FIRM
To The
Board of Directors
Chembio
Diagnostics, Inc. and Subsidiaries
Medford,
New York
We have
audited the consolidated balance sheet of Chembio Diagnostics, Inc. and
Subsidiaries (the “Company”) as of December 31, 2007 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Chembio Diagnostics,
Inc. and Subsidiaries as of December 31, 2007, and the consolidated results of
its operations and its cash flows for the year ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.
LAZAR
LEVINE & FELIX LLP
/s/ LAZAR LEVINE & FELIX
LLP
New York,
New York
March 7,
2008
F -
3
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED BALANCE
SHEETS
|
||||||||
|
AS
OF
|
||||||||
|
-
ASSETS -
|
||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,212,222 | $ | 2,827,369 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $10,000 for 2008 and
2007
|
809,303 | 946,340 | ||||||
|
Inventories
|
1,819,037 | 1,453,850 | ||||||
|
Prepaid
expenses and other current assets
|
225,153 | 243,748 | ||||||
|
TOTAL
CURRENT ASSETS
|
4,065,715 | 5,471,307 | ||||||
|
FIXED ASSETS, net of
accumulated depreciation
|
881,406 | 829,332 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
License
agreements, net of current portion
|
940,000 | 255,948 | ||||||
|
Deposits
and other assets
|
27,820 | 28,410 | ||||||
| $ | 5,914,941 | $ | 6,584,997 | |||||
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY -
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 2,383,021 | $ | 2,175,791 | ||||
|
Deferred
research and development revenue
|
- | 43,334 | ||||||
|
Current
portion of obligations under capital leases
|
18,780 | 23,458 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
2,401,801 | 2,242,583 | ||||||
|
OTHER
LIABILITIES:
|
||||||||
|
Obligations
under capital leases - net of current portion
|
60,808 | 79,588 | ||||||
|
License
fee payable - net of current portion
|
875,000 | - | ||||||
|
TOTAL
LIABILITIES
|
3,337,609 | 2,322,171 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||
|
Preferred
stock – 10,000,000 shares authorized, none outstanding
|
- | - | ||||||
|
Common
stock - $.01 par value; 100,000,000 shares authorized 61,944,901 and
60,537,534 shares issued and outstanding as of 2008 and 2007,
respectively
|
619,449 | 605,375 | ||||||
|
Additional
paid-in capital
|
39,252,350 | 39,003,148 | ||||||
|
Accumulated
deficit
|
(37,294,467 | ) | (35,345,697 | ) | ||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
2,577,332 | 4,262,826 | ||||||
| $ | 5,914,941 | $ | 6,584,997 | |||||
|
See
accompanying notes
|
||||||||
F -
4
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
FOR THE YEARS
ENDED
|
||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
REVENUES:
|
||||||||
|
Net
sales
|
$ | 10,355,768 | $ | 8,764,877 | ||||
|
Research
grant income
|
693,803 | 466,071 | ||||||
|
TOTAL
REVENUES
|
11,049,571 | 9,230,948 | ||||||
|
Cost
of sales
|
7,197,850 | 6,435,238 | ||||||
|
GROSS
PROFIT
|
3,851,721 | 2,795,710 | ||||||
|
OPERATING
EXPENSES:
|
||||||||
|
Research
and development expenses
|
2,605,343 | 1,906,653 | ||||||
|
Selling,
general and administrative expenses
|
3,317,046 | 3,765,221 | ||||||
|
TOTAL
OPERATING EXPENSES
|
5,922,389 | 5,671,874 | ||||||
|
LOSS
FROM OPERATIONS
|
(2,070,668 | ) | (2,876,164 | ) | ||||
|
OTHER
INCOME (EXPENSES):
|
||||||||
|
Other
income - net
|
95,812 | 120,862 | ||||||
|
Interest
income
|
34,403 | 145,289 | ||||||
|
Interest
expense
|
(8,317 | ) | (16,879 | ) | ||||
| 121,898 | 249,272 | |||||||
|
LOSS
BEFORE INCOME TAXES
|
(1,948,770 | ) | (2,626,892 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
NET
LOSS
|
(1,948,770 | ) | (2,626,892 | ) | ||||
|
Dividends
payable in stock to preferred stockholders
|
- | 5,645,310 | ||||||
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | (1,948,770 | ) | $ | (8,272,202 | ) | ||
|
Basic
and diluted loss per share
|
$ | (0.03 | ) | $ | (0.57 | ) | ||
|
Weighted
average number of shares outstanding, basic and diluted
|
61,266,954 | 14,608,478 | ||||||
|
See
accompanying notes
|
||||||||
F -
5
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
|||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|||||||||||||||||||||||||||||||||
|
FOR THE YEARS ENDED
DECEMBER 31, 2008 AND 2007
|
|||||||||||||||||||||||||||||||||
|
Series
A Preferred Stock
|
Series
B Preferred Stock
|
Common
Stock
|
Additional
paid in capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Amount
|
Amount
|
Amount
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
149.92119 | $ | 2,504,313 | 113.93591 | $ | 3,555,786 | 11,296,961 | $ | 112,970 | $ | 19,960,618 | $ | (27,073,494 | ) | $ | (939,807 | ) | ||||||||||||||||
|
Preferred
Stock related:
|
|||||||||||||||||||||||||||||||||
|
Accretion
of preferred dividend
|
- | 331,375 | - | 491,302 | - | - | - | (1,385,594 | ) | (562,917 | ) | ||||||||||||||||||||||
|
Payment
of dividends
|
- | (391,343 | ) | - | (758,087 | ) | 3,442,467 | 34,425 | 1,705,505 | - | 590,500 | ||||||||||||||||||||||
|
Common
Stock Issued:
|
|||||||||||||||||||||||||||||||||
|
Common
converted from preferred (including Series C)
|
(149.92119 | ) | (2,444,345 | ) | (113.93591 | ) | (3,289,001 | ) | 41,861,540 | 418,615 | 16,425,733 | (4,259,717 | ) | 6,851,285 | |||||||||||||||||||
|
For
services
|
- | - | - | - | 200,000 | 2,000 | 117,800 | - | 119,800 | ||||||||||||||||||||||||
|
Warrants
and options:
|
|||||||||||||||||||||||||||||||||
|
Consultants/Advisory
Board
|
- | - | - | - | - | - | 20,000 | - | 20,000 | ||||||||||||||||||||||||
|
Exercised
|
- | - | - | - | 3,736,566 | 37,365 | 1,082,996 | - | 1,120,361 | ||||||||||||||||||||||||
|
Fee
for plan
|
- | - | - | - | - | - | (561,816 | ) | - | (561,816 | ) | ||||||||||||||||||||||
|
Stock
option compensation
|
- | - | - | - | - | - | 252,312 | - | 252,312 | ||||||||||||||||||||||||
|
Net
loss for 2007
|
- | - | - | - | - | - | - | (2,626,892 | ) | (2,626,892 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2007
|
- | - | - | - | 60,537,534 | 605,375 | 39,003,148 | (35,345,697 | ) | 4,262,826 | |||||||||||||||||||||||
|
Warrants
and options:
|
|||||||||||||||||||||||||||||||||
|
Excercised
|
- | - | - | - | 1,407,367 | 14,074 | (14,074 | ) | - | - | |||||||||||||||||||||||
|
Stock
option compensation
|
- | - | - | - | - | - | 263,276 | - | 263,276 | ||||||||||||||||||||||||
|
Net
loss for 2008
|
- | - | - | - | - | - | - | (1,948,770 | ) | (1,948,770 | ) | ||||||||||||||||||||||
|
Balance
at December 31, 2008
|
- | $ | - | - | $ | - | 61,944,901 | $ | 619,449 | $ | 39,252,350 | $ | (37,294,467 | ) | $ | 2,577,332 | |||||||||||||||||
|
See
accompanying notes
|
|||||||||||||||||||||||||||||||||
F -
6
|
CHEMBIO DIAGNOSTICS,
INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
FOR THE YEARS
ENDED
|
||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS:
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Cash
received from customers
|
$ | 11,186,608 | $ | 9,802,348 | ||||
|
Cash
paid to suppliers and employees
|
(12,406,921 | ) | (11,276,554 | ) | ||||
|
Interest
received
|
34,403 | 145,289 | ||||||
|
Interest
paid
|
(8,317 | ) | (16,879 | ) | ||||
|
Net
cash used in operating activities
|
(1,194,227 | ) | (1,345,796 | ) | ||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Acquisition
of fixed assets
|
(397,462 | ) | (410,425 | ) | ||||
|
Net
cash used in investing activities
|
(397,462 | ) | (410,425 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds
from exercise of options and warrants, net of cash cost of financing of
$561,816 in 2007
|
- | 558,545 | ||||||
|
Payment
of accrued interest
|
- | (93,160 | ) | |||||
|
Payment
of dividends
|
- | (120,000 | ) | |||||
|
Payment
of capital lease obligation
|
(23,458 | ) | (52,181 | ) | ||||
|
Net
cash used in financing activities
|
(23,458 | ) | 293,204 | |||||
|
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(1,615,147 | ) | (1,463,017 | ) | ||||
|
Cash
and cash equivalents - beginning of the period
|
2,827,369 | 4,290,386 | ||||||
|
Cash
and cash equivalents - end of the period
|
$ | 1,212,222 | $ | 2,827,369 | ||||
|
RECONCILIATION
OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
|
||||||||
|
Net
Loss
|
$ | (1,948,770 | ) | $ | (2,626,892 | ) | ||
|
Adjustments:
|
||||||||
|
Depreciation
and amortization
|
345,388 | 283,359 | ||||||
|
Loss
on retirement of fixed assets
|
- | 12,146 | ||||||
|
Provision
for doubtful accounts
|
- | (32,922 | ) | |||||
|
Common
stock, options and warrants issued as compensation
|
291,979 | 342,163 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
137,037 | 436,822 | ||||||
|
Inventories
|
(365,187 | ) | (344,900 | ) | ||||
|
Prepaid
expenses and other assets
|
(10,108 | ) | (9,706 | ) | ||||
|
Other
assets and deposits
|
(683,462 | ) | 64,948 | |||||
|
Deferred
revenue
|
(43,334 | ) | - | |||||
|
Accounts
payable and accrued expenses
|
207,230 | 529,186 | ||||||
|
Licenses
fee payable
|
875,000 | - | ||||||
|
Net
cash used in operating activities
|
$ | (1,194,227 | ) | $ | (1,345,796 | ) | ||
|
Supplemental
disclosures for non-cash investing and financing
activities:
|
||||||||
|
Value
of common stock issued upon cashless warrant exercise
|
$ | 14,074 | $ | - | ||||
|
Value
of warrants/options/stock issued allocated to additional paid-in
capital
|
- | 61,181 | ||||||
|
Accreted
dividend to preferred stock
|
- | 1,385,594 | ||||||
|
Value
of Common stock issued as payment of dividend
|
- | 1,739,930 | ||||||
|
Value
of Preferred stock converted to common stock
|
- | 5,733,346 | ||||||
|
Assets
acquired under capital leases
|
- | 110,810 | ||||||
|
See
accompanying notes
|
||||||||
F -
7
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
NOTE
1
— DESCRIPTION
OF BUSINESS:
Chembio
Diagnostics, Inc. (the “Company” or “Chembio”) and its subsidiaries develop,
manufacture, and market rapid diagnostic tests that detect infectious diseases.
The Company’s main products are three rapid tests for the detection of HIV
antibodies in whole blood, serum and plasma samples, two of which were approved
by the FDA in 2006; the third is sold for export only. Rapid HIV
tests represented nearly 90% of the Company’s product revenues in
2008. The Company also has other rapid tests that together
represented approximately 10% of sales in 2008. The Company’s
products are sold to medical laboratories and hospitals, governmental and public
health entities, non-governmental organizations, medical professionals and
retail establishments. Chembio’s products are sold under the Company’s STAT PAK®
or SURE CHECK ® registered trademarks or under the private labels of its
marketing partners, for example the Clearview® label owned by Inverness Medical
Innovations, Inc., which is the Company’s exclusive marketing partner for its
rapid HIV lateral flow test products in the United States. These
products employ lateral flow technologies that are proprietary and/or licensed
to the Company. All of the Company’s products that are currently
being developed are based on its patented Dual Path Platform (DPP®), which is a
unique diagnostic point-of-care platform that has certain advantages over
lateral flow technology. In 2008, the Company completed development
of its first two products that employ the DPP® and has a number of additional
products under development that employ the DPP®.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. Although
revenues and gross margins increased in the year ended December 31, 2008 as
compared to the same period in 2007, the Company continues to generate
significant operating losses. At December 31, 2008, the Company had a positive
stockholders’ equity of $2,577,000 and working capital of $1,664,000. The
Company estimates that its resources are sufficient to fund its needs through
the end of 2009 and beyond or that, in the alternative, it could raise
additional capital although the terms under which that capital could be raised
would likely be very dilutive to current shareholders. The Company’s liquidity
and cash requirements will depend on several factors. These factors include (1)
the level of revenues (the Company received $340,000 in 2009 for license fees
for which we need to meet certain milestones to earn); (2) the extent to which,
if any, that revenue level improves operating cash flows; (3) the Company’s
investments in research and development, facilities, marketing, regulatory
approvals, and other investments it may determine to make; and (4) the
investment in capital equipment (including production equipment of $323,500 that
the Company has contracted for) and the extent to which it improves cash flow
through operating efficiencies. There are no assurances that the Company will
become profitable or generate positive cash flow by the end of 2009 or, in the
alternative, be successful in raising sufficient capital to fund its needs
through 2009.
NOTE
2
— SIGNIFICANT
ACCOUNTING POLICIES:
|
(a)
|
Principles
of Consolidation:
|
The
consolidated financial statements include the accounts of the Company, and its
wholly owned subsidiary. All intercompany transactions and balances
have been eliminated in consolidation.
|
(b)
|
Use
of Estimates:
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F -
8
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
|
(c)
|
Fair
Value of Financial Instruments:
|
Fair
values of cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets and accounts payable and accrued expenses reflected in
these financial statements approximate carrying value as these are short-term in
nature.
|
(d)
|
Statements
of Cash Flows:
|
For
purposes of the statements of cash flows the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
|
(e)
|
Concentrations
of Credit Risk:
|
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments and trade receivables.
The Company places its temporary cash instruments with well-known financial
institutions and, at times, may maintain balances in excess of the $250,000 FDIC
Insurance limit. The Company monitors the credit ratings of the
financial institutions to mitigate this risk. The Company maintains
three accounts with a well established multi-national bank and as of December
31, 2008 had approximately $1.1 million above these limits. Concentration of
credit risk with respect to trade receivables is principally mitigated by the
Company’s obtaining of letters of credit from certain foreign customers, and its
diverse customer base both in number of customers and geographic
locations. We currently do not require collateral.
|
(f)
|
Inventories:
|
Inventories,
consisting
of material, labor and manufacturing overhead, are stated at the
lower of cost or market. Cost is determined on the first-in,
first-out method.
|
(g)
|
Fixed
Assets:
|
Fixed
assets are stated at cost less accumulated depreciation. Depreciation
is computed using the straight line method over the estimated useful lives of
the respective assets, which range from three to seven
years. Leasehold improvements are amortized over the useful life of
the asset or the lease term, whichever is shorter.
|
(h)
|
License
Agreement:
|
In
February 2008, the Company entered into a sublicense agreement (see Note 6) for
which it has recorded an asset of $1,000,000. This asset is being
expensed over an estimated economic life of ten years. The current
portion of this asset is $100,000 and is reported in prepaid expenses and other
current assets. The long-term portion as of December 31, 2008 is
$800,000 and is reflected in other assets along with other unexpensed long-term
license fees of $140,000.
|
(i)
|
Impairment
of Long-Lived Assets and Intangible
Assets
|
In
accordance with FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", long-lived assets to be held and used are analyzed for
impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. The Company evaluates at
each balance sheet date whether events and circumstances have occurred that
indicate possible impairment. If there are indications of impairment,
the Company uses future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value. We
believe that the carrying values of our long-lived tangible and intangible
assets were realizable at December 31, 2008.
F -
9
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
|
(j)
|
Revenue
Recognition:
|
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB
104”). Under SAB 104, revenue is recognized when there is persuasive
evidence of an arrangement, delivery has occurred or services have been
rendered, the sales price is determinable, and collectability is reasonably
assured. Revenue typically is recognized at time of
shipment. Sales are recorded net of discounts, rebates and
returns.
The
Company recognizes income from research projects and grants when
earned. Grants are invoiced after expenses are
incurred. Any projects or grants funded in advance are deferred until
earned.
|
(k)
|
Shipping
and Handling Costs:
|
We incur
shipping and handling costs associated with the shipment of goods to customer
and independent distributors. All shipping and handling amounts
billed to customers are included in net sales. All shipping and
handling costs associated with the shipment of goods to customers are netted
against the amounts billed and are reflected in net sales. All other
shipping and handling costs are included in selling, general and administrative
expenses.
|
(l)
|
Research
and Development:
|
Research
and development costs are charged to expense as incurred.
|
(m)
|
Stock
Based Compensation:
|
The
Company’s 2008 Stock Incentive Plan and 1999 Stock Option Plan (“Plans”)
are accounted for in accordance with the recognition and measurement provisions
of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004),
Share-Based Payment ("FAS 123(R)"). FAS 123(R) requires compensation costs
related to share-based payment transactions, including employee stock options,
to be recognized in the financial statements. In addition, the Company adheres
to the guidance set forth within Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 107 ("SAB 107"), which provides the Staff's views
regarding the interaction between FAS No. 123(R) and certain SEC rules and
regulations and provides interpretations with respect to the valuation of
share-based payments for public companies. See Note 12 for further
details.
|
(n)
|
Income
Taxes:
|
The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (FAS
109). Under FAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse.
Effective
January 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (“FIN 48”).
FIN 48 prescribes a more-likely-than-not threshold for financial statement
recognition and measurement of a tax position taken, or expected to be taken, in
a tax return. FIN 48 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements. Any interest and penalties accrued
related to unrecognized tax benefits will be recorded in tax
expense. The adoption of FIN 48 had no impact on the Company’s
financial statements for the year ended December 31, 2007.
F -
10
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
|
(o)
|
Earnings
Per Share
|
The
following weighted average shares were used for the computation of basic and
diluted earnings per share:
|
For the years ended
|
||||
|
December
31, 2008
|
December
31, 2007
|
|||
|
Basic
|
61,266,954
|
14,608,478
|
||
|
Diluted
|
61,266,954
|
14,608,478
|
||
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. Diluted loss per share for the years ended December 31, 2008 and 2007 is the same as basic loss per share, since the effects of the calculation were anti-dilutive due to the fact that the Company incurred losses for all periods presented. The following securities, presented on a common share equivalent basis, have been excluded from the per share computations:
|
For the years ended
|
||||
|
December
31, 2008
|
|
December
31, 2007
|
||
|
1999
& 2008 Plan Stock Options
|
2,555,837
|
2,015,352
|
||
|
Other
Stock Options
|
124,625
|
124,625
|
||
|
Warrants
|
14,657,050
|
25,972,223
|
||
|
Convertible
Preferred Stock
|
-
|
25,872,315
|
||
|
17,337,512
|
53,984,515
|
|||
|
(p)
|
Recent
Accounting Pronouncements Affecting the
Company:
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement does not require any new fair
value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the information.
FAS No. 157 is effective for fiscal years beginning after November 15,
2007, and all interim periods within those fiscal years. In February 2008, the
FASB released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB
Statement No. 157) which delays the effective date of FAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. The implementation of FAS
No. 157 for financial assets and liabilities, effective January 1,
2008, did not have an impact on the Company’s financial position and results of
operations. The Company is currently evaluating the impact of
adoption of this statement on its nonfinancial assets and liabilities which is
expected to be determined by the first quarter of fiscal 2009.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS No. 159”). FAS No. 159 permits entities
to choose to measure, on an item-by-item basis, specified financial instruments
and certain other items at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are required to be
reported in earnings at each reporting date. FAS No. 159 is effective
for fiscal years beginning after November 15, 2007, the provisions of which are
required to be applied prospectively. The Company adopted this
statement as of January 1, 2008 and has elected not to apply the fair value
option to any of its financial instruments.
F -
11
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business
Combinations, which replaces FAS No 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. FAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The
adoption of FAS 141R is not expected to have an impact on the Company’s
financial statements.
In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51.” FAS
160 establishes accounting and reporting standards pertaining to ownership
interests in subsidiaries held by parties other than the parent, the amount of
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest, and the valuation of any retained
noncontrolling equity investment when a subsidiary is
deconsolidated. This statement also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. FAS 160 is
effective for fiscal years beginning on or after December 15,
2008. The adoption of FAS 160 is not currently expected to have a
material effect on the Company’s consolidated financial position, results of
operations, or cash flows.
In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities – an Amendment of FASB Statement No. 133.” The new standard
is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company is currently evaluating the impact of
adopting FAS No. 161 on its financial statements.
In
December 2007, the Emerging Issues Task Force (“EITF”) reached a consensus with
respect to Issue No. 07-1 “Accounting for Collaborative Arrangements”. This EITF
applies to participants in a collaborative arrangement. A collaborative
arrangement is a contractual arrangement that involves a joint operating
activity. These arrangements involve two (or more) parties who are both (a)
active participants in the activity and (b) exposed to significant risks and
rewards dependent on the commercial success of the activity. Many collaborative
arrangements involve licenses of intellectual property, and the participants may
exchange consideration related to the license at the inception of the
arrangement. Participants in a collaborative arrangement shall report costs
incurred and revenue generated from transactions with third parties (that is,
parties that do not participate in the arrangement) in each entity's respective
income statement pursuant to the guidance in EITF No. 99-19. An entity should
not apply the equity method of accounting under APB 18 to activities of
collaborative arrangements. This EITF, which can be applied retrospectively, is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years. The
guidance in this EITF is not expected to have an impact on the Company’s
financial statements.
In June
2007, EITF reached a consensus with respect to Issue No. 07-3 “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities”. EITF 07-3 confirms that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense as the
related goods are delivered or the related services are performed. If
an entity does not expect the goods to be delivered or services to be rendered,
the capitalized advance payment should be charged to expense. This
EITF is effective for financial statements issued for fiscal years beginning
after December 15, 2007. The guidance in this EITF had no impact on
the Company’s financial statements in 2008.
F -
12
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
|
(q)
|
Reclassifications
|
As of the
year ended December 31, 2008 the Company reclassified its royalty and license
expenses to cost of goods sold, instead of selling, general and administrative
expenses.
NOTE
3
— INVENTORIES:
Inventories
consist of the following at December 31:
|
2008
|
2007
|
|||
|
Raw
materials
|
$ 836,446
|
$ 705,873
|
||
|
Work
in process
|
300,986
|
234,077
|
||
|
Finished
goods
|
681,605
|
513,900
|
||
|
$ 1,819,037
|
$ 1,453,850
|
|||
NOTE
4
— FIXED
ASSETS:
Fixed
assets consist of at December 31:
|
2008
|
2007
|
||
|
Machinery
and equipment
|
$ 1,195,975
|
$982,440
|
|
|
Furniture
and fixtures
|
195,611
|
156,313
|
|
|
Computer
and telephone equipment
|
329,865
|
308,591
|
|
|
Leasehold
improvements
|
400,589
|
306,676
|
|
|
Automobiles
|
29,442
|
-
|
|
|
2,151,482
|
1,754,020
|
||
|
Less
accumulated depreciation and amortization
|
(1,270,076)
|
(924,688)
|
|
|
$ 881,406
|
$829,332
|
Included
in the above fixed assets is $70,500 and $121,000, net of accumulated
depreciation of $40,000 and $69,000 of assets held under capital leases as of
December 31, 2008 and 2007, respectively. Depreciation expense
for the 2008 and 2007 years aggregated $345,388 and $283,359,
respectively.
F -
13
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
NOTE
5
— ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES:
Accounts
payable and accrued liabilities as of December 31:
|
2008
|
2007
|
|||
|
Accounts
payable – suppliers
|
$ 634,083
|
$ 726,174
|
||
|
Accrued
commissions
|
67,857
|
14,251
|
||
|
Accrued
royalties / license fees (see Note 8)
|
1,400,941
|
852,119
|
||
|
Accrued
payroll
|
95,135
|
279,598
|
||
|
Accrued
vacation
|
91,895
|
155,480
|
||
|
Accrued
legal and accounting
|
18,000
|
10,000
|
||
|
Accrued
expenses – other
|
75,110
|
138,169
|
||
|
TOTAL
|
$ 2,383,021
|
$ 2,175,791
|
||
NOTE
6
— LICENSE
FEE PAYABLE:
In
February 2008, the Company entered into a sublicense agreement (the “Agreement”)
with Bio-Rad Laboratories, Inc. and Bio-Rad Pasteur (collectively,
“Bio-Rad”). Bio-Rad is the exclusive licensee of the HIV-2 patent
portfolio held by Institute Pasteur of Paris, France. Pursuant to the
terms of the Agreement, Bio-Rad sublicensed to the Company patents related to
the manufacture, use or sale of HIV-2 in the Company’s HIV screening
assays. In exchange for global non-exclusive rights to the patents,
the Agreement provides that the Company will pay Bio-Rad a $1,000,000 sublicense
fee, $500,000 payable during 2008, of which $125,000 has been paid and $375,000
was payable by December 31, 2008, with the additional $500,000 being payable by
December 31, 2009. On January 29, 2009, the Company and Bio-Rad
agreed to defer the remaining $875,000 of payments due under the HIV-2
sub-license originally granted by Bio-Rad to Chembio in February 2008 to one
payment due in December 2010. The Company will also pay Bio-Rad a
royalty on net sales in the United States and Canada, if any, of rapid test
immunoassay tests sold under the Company’s brands of Licensed Products as
defined in the Agreement. The Agreement will continue until the expiration of
the last-to-expire of the sublicensed patents, unless otherwise terminated at an
earlier date by the Company or Bio-Rad (see Note 2(h)).
NOTE
7 — OBLIGATIONS UNDER
CAPITAL LEASES:
The
Company is obligated under capitalized leases for certain manufacturing and
computer equipment.
Future
minimum lease payments under these capitalized lease obligations, including
interest as of December 31, 2008 were as follows:
Year
ending December 31,
|
2009
|
$28,572
|
|
|
2010
|
28,572
|
|
|
2011
|
28,572
|
|
|
2012
|
15,204
|
|
|
100,920
|
||
|
Less:
imputed interest
|
(21,332
|
)
|
|
Present
value of future minimum lease payments
|
79,588
|
|
|
Less:
current maturities
|
(18,780
|
)
|
|
$
60,808
|
These
leases have annual interest rates ranging from 13% - 15%.
F -
14
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
NOTE
8
— RELATED
PARTIES:
In
September 2006, the Company received an investment of $2,000,000 from Inverness
Medical Innovations, Inc. (“Inverness”). Inverness markets the
Company’s FDA-approved rapid HIV tests under Inverness’ Clearview® brand,
Chembio received a nonexclusive license to Inverness’ lateral flow
patents. The distribution agreements with Inverness contain gross
margin sharing formulae among Inverness, the Company and, in the case of the HIV
barrel product, StatSure Diagnostic Systems, Inc.
During
the quarter ended December 31, 2008, Inverness Medical Innovations, Inc.
(“Inverness”) notified the Company that Inverness had entered into a contract
with Bio-Rad Laboratories, Inc. (“Bio-Rad”) for royalties on Bio-Rad’s patent
for the detection of HIV-2 antibodies. The agreement also provided
for Inverness to pay past royalties. The agreements between the
Company and Inverness provide that the Company is to share in these past
royalties and Inverness requested it be reimbursed for the Company’s share of
these past royalties. The Company and Inverness have agreed that this
liability, which is approximately $500,000 as of December 31, 2008 (included in
accounts payable and accrued expenses – see Note 5), is to be paid from future
revenues over approximately the next 18 months.
NOTE
9
— RESEARCH
GRANTS AND DEVELOPMENT CONTRACTS:
In 2008
and 2007, the Company earned $694,000 and $466,000, respectively from research
grants, feasibility and development contracts. The Company is
now involved in additional feasibility and development contracts related to its
DPP® technology.
NOTE
10
— INCOME
TAXES:
No
provision for Federal income taxes was required for the years ended December 31,
2008 or 2007, due to the Company’s operating losses. At December 31,
2008 and 2007, the Company has unused net operating loss carry-forwards of
approximately $22,200,000 and $21,000,000 which expire at various dates through
2028. Most of this amount is subject to annual limitations under
certain provisions of the Internal Revenue Code related to “changes in
ownership”. In addition the Company has a research and development
credit carryforward of approximately $505,000 and $460,000 for the years ended
December 31, 2008 and 2007, respectively which expire at various dates through
2028.
As of
December 31, 2008 and 2007, the deferred tax assets related to the
aforementioned carry-forwards have been fully offset by valuation allowances,
since significant utilization of such amounts is not presently expected in the
foreseeable future.
Deferred
tax assets and valuation allowances consist of:
|
2008
|
2007
|
|||
|
Net
operating loss carry-forwards
|
$7,750,000
|
$7,300,000
|
||
|
Research
and development credit
|
505,000
|
551,000
|
||
|
Other
|
343,000
|
137,000
|
||
|
Gross
deferred tax assets
|
8,598,000
|
7,988,000
|
||
|
Valuation
allowances
|
(8,598,000
|
)
|
(7,988,000
|
)
|
|
Net
deferred tax assets
|
$ —
|
$ —
|
We file
income tax returns in the U.S. federal and New York state
jurisdictions. Tax years for fiscal 2005 through 2007 are open and
potentially subject to examination by the federal and New York state taxing
authorities.
F -
15
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
NOTE 11
— STOCKHOLDERS’
EQUITY:
(a) Common Stock
During
the June 30, 2008 quarter, warrants to purchase 9,323,854 shares of the
Company’s common stock were exercised on a cashless basis, resulting in the
issuance of 1,407,367 shares of common stock. These warrants were exercised
on a cashless basis in connection with the Company’s preferred stock and warrant
amendments that were completed on December 19, 2007 (“Plan”), and the Company
received no cash consideration for these issuances of common stock.
On
December 19, 2007 the Company issued pursuant to the Plan:
i) 99,086,
599,331, and 574,818 shares of common stock for the payment of dividends for the
Series A, B and C preferred stock, respectively. These shares were
valued, in the aggregate at $558,000, using the respective conversion price at
the time of the conversion of the preferred stock;
ii) 10,134,954,
13,938,118, and 17,187,496 shares of common stock for the conversion of the
Series A, B and C preferred stock, respectively. These shares were valued, in
the aggregate at $16,504,000, using the market price on December 19,
2007;
iii) 963,163
shares of common stock for the cashless exercise of 6,381,052 warrants,
and
iv) 2,723,403
shares of common stock for the cash exercise of warrants where the Company
received $1,089,000 less $562,000 paid in fees.
During
the year ended December 31, 2007, the Company issued 200,000 shares of its
Common Stock upon the execution of an employment agreement, of which 100,000
shares vested immediately, 50,000 shares will vest on March 5, 2008 and 50,000
shares will vest on March 5, 2009. These shares were valued at
the market price on the date of grant and aggregated $119,800 and are being
expensed over the vesting periods.
During
year ended December 31, 2007 the Company issued 50,000 shares of its Common
Stock upon the exercise of options and received cash of $31,000.
During
the year ended December 31, 2007 Series A Preferred shareholders, other than in
the Plan, converted 8.33092 shares of Series A Preferred Stock into 416,546
shares of Common Stock.
During
the year ended December 31, 2007 Series B Preferred shareholders, other than in
the Plan, converted 2.25 shares of Series B Preferred Stock into 184,426 shares
of Common Stock.
In the
year ended December 31, 2007, other than in the Plan, the Company issued
897,896, 835,577 and 435,759 shares of its Common Stock as payment of dividends
on its Series C Preferred Stock, Series B Preferred Stock and Series A Preferred
Stock, respectively. These shares were valued, in the aggregate at $1,182,000,
using a volume weighted average price (VWAP) for the ten trading days
immediately preceding the issue date.
(b) Warrants
On
December 19, 2007, in connection with the Plan certain holders of the
Non-Employee Warrants did not consent to the Plan
transactions. Pursuant to the anti-dilution terms existing in certain
of the Non-Employee Warrants held by these non-consenting holders, the number of
warrants that these non-consenting holders are permitted to exercise has been
increased by 2,395,466. In addition, the exercise prices of certain
of the Non-Employee Warrants held by non-consenting holders was reduced to $0.40
pursuant to the terms of these warrants, and these non-consenting holders are
permitted to exercise their warrants for cash only at $0.40 per share until the
expiration of the warrants. The increased warrants expire as follows:
a) 1,303,928 on January 29, 2010; b) 149,350 on June 29, 2011; and c) 942,188 on
October 5, 2011.
F -
16
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
During
the year ended December 31, 2007, the Company issued warrants to purchase 33,381
shares of Common Stock at an exercise price of $0.81 per share to a sales agent
as payment for commissions accrued at year end 2006 (value
$20,000). These warrants have a five-year life.
The above
warrants were valued using a Black-Scholes option pricing model based on
assumptions for expected volatility of 104.8%, expected life of 5 years and
expected risk-free interest rate of 4.54%.
(c) Series A 8%
Convertible Preferred Stock:
On
December 19, 2007 (the “Closing Date”) amendments to the governing documents for
the Company’s Series A, Series B and Series C Convertible Preferred Stock
(collectively, the “Preferred Stock”) and for certain warrants and options
(collectively, the “Non-Employee Warrants”) not including options or warrants
issued to employees or directors in their capacity as such (these actions
collectively, the “Plan”) were approved by the Company and the requisite
percentages of the holders of the Preferred Stock and of the Non-Employee
Warrants.
On
December 19, 2007, according to the Plan, all of the Series A preferred stock
was converted into common stock. The common stock issued was valued
at the market price on December 19, 2007 of $.40 per share. This
value was adjusted against the carrying value of the Series A Preferred Stock
and the difference of $1,726,000 was charged to deemed dividends.
The
Series A Preferred Stock was issued in 2004 at a face value of $30,000 per share
with detachable warrants. The recorded amount of the preferred shares was
calculated using a fair value allocation between the preferred shares and
detachable warrants.
(d) Series B 9%
Convertible Preferred Stock:
On
December 19, 2007, according to the Plan, all of the Series B preferred stock
was converted into common stock. The common stock issued was valued
at the market price on December 19, 2007 of $.40 per share. This
value was adjusted against the carrying value of the Series B Preferred Stock
and the difference of $2,349,000 was charged to deemed dividends.
The
Series B Preferred Stock was issued in January 2005 at a face value of $50,000
per share with detachable warrants. The recorded amount of the preferred shares
was calculated using a fair value allocation between the preferred shares and
detachable warrants. On March 30, 2006, the Company sold $1 million of
additional Series B Preferred Stock to a Series B Preferred shareholder pursuant
to provisions of the January 2005 Series B 9% Preferred Stock financing
agreements. Such provisions were exclusive to said
shareholder. Approximately $140,000 of these proceeds was used to pay
cash dividends which were accrued as of December 31, 2005. The
recorded amount of the preferred shares was calculated using a fair value
allocation between the preferred shares and detachable warrants.
(e) Series
C
7%
Convertible Preferred Stock:
On
December 19, 2007, according to the Plan, all of the Series C preferred stock
was converted into common stock. The common stock issued was valued
at the market price on December 19, 2007 of $.40 per share. This
value was adjusted against the carrying value of the Series C Preferred Stock
and the difference of $185,102 was charged to deemed dividends.
On
September 29, 2006 and October 5, 2006, the Company sold $8.25 million of Series
C Preferred Stock (see Note 1) pursuant to provisions of the September 29, 2006
as amended on October 5, 2006 Series C 7% Preferred Stock financing
agreements. In addition the Company issued 2,578,125 warrants to the
investors.
F -
17
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
NOTE
12
—
EMPLOYEE
STOCK OPTION PLAN:
The
Company had a 1999 Stock Option Plan (“SOP”) originally covering 1,500,000
shares of Common Stock. Under the terms of the SOP, the Compensation Committee
of the Company’s board is authorized to grant incentive options to key employees
and to grant non-qualified options to key employees and key individuals. The
options become exercisable at such times and under such conditions as determined
by the Compensation Committee. The SOP was amended at the Company’s
2005 stockholders’ meeting. The number of options under the SOP was
increased to cover 3,000,000 shares of common stock. It was also
amended to allow independent directors to be eligible for grants under the
portion of the SOP concerning non-qualified options.
Effective June 3, 2008,
the Company’s stockholders voted to approve the 2008 Stock Incentive Plan
(“SIP”). Under the terms of the SIP, the Compensation Committee of
the Company’s board shall have the discretion to select the persons to whom
Awards are to be granted. Awards can be incentive stock options, restricted
stock and/or restricted stock units. The Awards become vested at such times and
under such conditions as determined by the Compensation Committee.
As a
result of the adoption of FAS 123(R), the Company's results for the years ended
December 31, 2008 and 2007 include share-based compensation expense totaling
$263,000 and $252,000, respectively. Such amounts have been included
in the Consolidated Statements of Operations within cost of goods sold ($19,000
and none, respectively), research and development ($56,000 and $100,000,
respectively) and selling, general and administrative expenses ($188,000 and
$152,000, respectively). No income tax benefit has been recognized in
the income statement for share-based compensation arrangements due to the
history of operating losses.
Stock
option compensation expense in the years ended December 31, 2008 and
2007 represent the estimated fair value of options outstanding which are
being amortized on a straight-line basis over the requisite vesting period of
the entire award.
The
weighted average estimated fair value of stock options granted in the years
ended December 31, 2008 and 2007 was $.37 and $.46 per share,
respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model. The expected volatility
is based upon historical volatility of our stock and other contributing factors.
The expected term is determined using the simplified method as permitted by SAB
107, as the Company has no history of employee exercise of options
to-date.
The
assumptions made in calculating the fair values of options are as
follows:
|
For the years ended
|
|||
|
December
31, 2008
|
December
31, 2007
|
||
|
Expected
term (in years)
|
1
to 4
|
5
|
|
|
Expected
volatility
|
109.33-112.33%
|
102.84-104.80%
|
|
|
Expected
dividend yield
|
n/a
|
n/a
|
|
|
Risk-free
interest rate
|
1.91
to 2.98%
|
4.50-5.06%
|
|
The
Company granted 967,650 new options under the Plans during the year ended
December 31, 2008 at prices ranging from $.13 to $0.22 per share (534,000 were
issued under the SOP and 433,650 were issued under the SIP). As of February
15, 2008, the board of directors voted to re-price any SOP options in excess of
$.48 to $.48, the estimated expense related to this re-price is
$20,000.
F -
18
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
The
following table provides stock options activity for the years ended December 31,
2008 and 2007:
|
Stock
Options
|
Number
of Shares
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
|||
|
Outstanding
at January 1, 2007
|
1,529,750
|
$0.65
|
|||||
|
Granted
|
960,000
|
$0.57
|
|||||
|
Exercised
|
(50,000)
|
$0.62
|
|||||
|
Forfeited/expired
/cancelled
|
(238,250)
|
$0.67
|
|||||
|
Outstanding
at December 31, 2007
|
2,201,500
|
$0.64
|
3.52
years
|
$ -
|
|||
|
Impact of re-price
(for accounting purposes treated as a cancelation and
re-issue):
|
|||||||
|
effect
as if cancelled
|
(1,846,500)
|
$0.64
|
|||||
|
effect
as if re-issiued
|
1,846,500
|
$0.48
|
|||||
|
Granted
|
967,650
|
$0.18
|
|||||
|
Exercised
|
-
|
-
|
|||||
|
Forfeited/expired
|
(752,500)
|
$0.58
|
|||||
|
Outstanding
at December 31, 2008
|
2,416,650
|
$0.36
|
3.23
years
|
$ -
|
|||
|
|
|||||||
|
Exercisable
at December 31, 2008
|
1,956,650
|
$0.36
|
3.11
years
|
$ -
|
|||
The
following table summarizes information about stock options outstanding as of
December 31, 2008:
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|||||||||||||||||||||||
|
Range
of Exercise Prices
|
Shares
|
Average
Remaining Contract Life (Year)
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Shares
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
|||||||||||||||||
| $ | 0.13 - 0.21 | 442,650 | 4.42 | 0.130 | $ | - | 298,650 | 0.131 | $ | - | ||||||||||||||
| $ | 0.22 - 0.34 | 465,000 | 4.13 | 0.220 | - | 465,000 | 0.220 | - | ||||||||||||||||
| $ | 0.35 - 0.45 | 65,000 | 1.77 | 0.427 | - | 15,000 | 0.350 | - | ||||||||||||||||
| $ | 0.46 - 0.88 | 1,444,000 | 2.65 | 0.483 | - | 1,178,000 | 0.482 | - | ||||||||||||||||
|
Total
|
2,416,650 | 0.366 | $ | - | 1,956,650 | 0.365 | $ | - | ||||||||||||||||
As of
December 31, 2008, there was $74,000 of net unrecognized compensation cost
related to stock options that are not vested, which is expected to be recognized
over a weighted average period of approximately 1.25 years. The total
fair value of shares vested during the years ended December 31, 2008 and 2007,
was $273,000 and $276,000, respectively.
NOTE
13 —
GEOGRAPHIC
INFORMATION:
FAS No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for the way that business enterprises report information
about operating segments in financial statements and requires that those
enterprises report selected information. It also establishes standards for
related disclosures about product and services, geographic areas, and major
customers.
F -
19
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
The
Company produces only one group of similar products known collectively as “rapid
medical tests”. As per the provisions of FAS 131, management believes that it
operates in a single business segment. Net sales by geographic area are as
follows:
| For the years ended | ||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Africa
|
$ | 4,740,858 | $ | 3,784,791 | ||||
|
Asia
|
227,049 | 158,577 | ||||||
|
Europe
|
160,824 | 153,808 | ||||||
|
Middle
East
|
308,053 | 239,838 | ||||||
|
North
America
|
2,415,344 | 4,226,442 | ||||||
|
South
America
|
2,503,640 | 201,421 | ||||||
| $ | 10,355,768 | $ | 8,764,877 | |||||
Sales to Africa in 2008 were primarily from Nigeria of approximately $2.86 million. We have been advised recently that our designation in Nigeria as one of the screening tests has changed to that of the confirmatory test as this country moves from a parallel to a serial testing algorithm, which we expect will significantly reduce our sales to Nigeria in 2009, In addition sales to North America and South America in 2008 were primarily from sales into the U.S. and Brazil, respectively.
NOTE
14
—
COMMITMENTS
AND CONTINGENCIES:
Employment
Contracts:
The
Company has contracts with two key employees. The contracts call for
salaries presently aggregating $500,000 per year. One contract
expires in May of 2009 and one contract expires in March of 2010. The
following table is a schedule of future minimum salary commitments:
|
2009
|
$
319,166
|
|
2010
|
39,167
|
|
$
358,333
|
Pension Plan:
The
Company has a 401(k) plan established for its employees. The Company
elected to match 20% of the first 5% (or 1% of salary) that an employee
contributes to their 401(k) plan. Expenses related to this matching
contribution aggregated $23,850 and $20,500 for the years ended December 31,
2008 and 2007, respectively.
As of
January 19, 2009, the Company suspended the matching contribution.
Obligations
Under Operating Leases:
The
Company leases office, R&D and manufacturing facilities, currently with a
monthly rent of $11,987. The current lease expires on April 30,
2009. The following is a schedule of future minimum rental
commitments:
|
Year
ending December 31,2009
|
$
47,948
|
F -
20
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
As of the
filing date of this Annual Report, the Company is in discussion
for a lease extension for its administrative offices and research
facilities. The principle terms being discussed are as
follows: (a) a lease term of five years; (b) an initial rent of
$11,350 per month; (c) the monthly rent for year two of the lease will
increase by the lower of (i) the change in the consumer price index, or
(ii) five percent; and (d) the monthly rent for years three through
five of the lease will increase each year by the lower of (i) the change in
the consumer price index, or (ii) two and one half percent. Although
the Company believes that the extension will be entered into on terms that are
substantially similar to the terms being discussed, there is no assurance
that this will occur. After this lease is executed the following
would be the schedule of future minimum rental commitments (assuming 5% increase
the first year and 2.5% thereafter):
Year
ending December 31,
|
2009
|
$ | 138,748 | ||
|
2010
|
140,740 | |||
|
2011
|
145,394 | |||
|
2012
|
149,029 | |||
|
2013
|
152,754 | |||
|
2014
|
51,473 | |||
| $ | 778,138 |
Rent
expense aggregated $130,300 and $123,500 for the years ended December 31, 2008
and 2007, respectively.
Economic
Dependency:
The
following table delineates sales the Company had to customers in excess of 10%
of total sales for the periods indicated:
|
For
the years ended
|
Accounts
Receivable
|
||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
As
of
|
|||||||||||||||||
|
Sales
|
%
of Sales
|
Sales
|
%
of Sales
|
Dec
31, 2008
|
Dec
31, 2007
|
||||||||||||||
|
Customer
1
|
$ | 2,434,420 | 24 | * | * | $ | 265,276 | * | |||||||||||
|
Customer
2
|
$ | 3,502,737 | 34 | $ | 2,248,992 | 26 | - | - | |||||||||||
|
Customer
3
|
$ | 2,183,510 | 21 | $ | 2,456,071 | 28 | $ | 283,722 | $ | 222,396 | |||||||||
|
Customer
4
|
* | * | $ | 1,398,125 | 16 | * | - | ||||||||||||
In the
table above the asterisk (*) indicates that sales to the customer did not exceed
10% for the period indicated.
The
following table delineates purchases the Company had to vendors in excess of 10%
of total purchases for the periods indicated:
|
For
the years ended
|
Accounts
Payable
|
||||||||||||||||||
|
December
31, 2008
|
December
31, 2007
|
As
of
|
|||||||||||||||||
|
Purchases
|
%
of Purc.
|
Purchases
|
%
of Purc.
|
Dec.
31, 2008
|
Dec.
31, 2007
|
||||||||||||||
|
Vendor
1
|
$ | 627,637 | 21 | $ | 356,136 | 15 | $ | 17,460 | $ | 19,469 | |||||||||
|
Vendor
2
|
$ | 303,750 | 10 | * | * | $ | 87,840 | * | |||||||||||
In the
table above the asterisk (*) indicates that purchases from the vendor’s did not
exceed 10% for the period indicated.
The
Company currently buys materials which are purchased under intellectual property
rights agreements and are important components in its
products. Management believes that other suppliers could provide
similar materials on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would affect operating results adversely.
F -
21
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
Governmental
Regulation:
All of
the Company’s existing and proposed diagnostic products are regulated by the
United States Food and Drug Administration (FDA), United States Department of
Agriculture, certain state and local agencies, and/or comparable regulatory
bodies in other countries. Most aspects of development, production,
and marketing, including product testing, authorizations to market, labeling,
promotion, manufacturing, and record keeping are subject to
review. After marketing approval has been granted, Chembio must
continue to comply with governmental regulations. Failure to comply
with these regulations can result in significant penalties.
Voluntary
Component Recall:
In April
2008, we initiated a voluntary recall of two lots of Control kits used with our
HIV 1-2 Stat Pak® Assay distributed by Inverness under its Clearview® brand.
Control kits are to be used in order to verify the operator’s ability to
properly perform the test and to interpret the results. These kits are supplied
directly to Inverness by our vendor in accordance with our specifications and
instructions. In the case of these two lots of Control kits, although
they met our specifications, they were at the lower limit of such
specifications, and this produced some issues with the interpretation of the
Control kit results by certain customers. Chembio has provided the kit supplier
with a more clearly defined specification and has reviewed copies of revised
manufacturing and testing procedures to ensure implementation of the new
specification. Based upon this new specification, packaged HIV Rapid Test
Control Packs containing the new HIV Controls have been in distribution since
May 2008. The FDA has classified this voluntary recall as a Class II recall, “a
situation in which the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences are
remote”. Approximately $22,000 in costs were incurred in 2008. We
have completed all of our recall activity, including monitoring and final
product disposition and the FDA has issued a letter to the Company confirming
that this investigation is officially closed.
Nigeria:
During
the first quarter of 2008, the Nigerian Ministry of Health published a report
indicating that our designation in Nigeria as one of the screening tests would
be changed to that of a confirmatory and/or tie-breaker test (Many countries use
a serial algorithm with tests from different manufacturers. A serial
algorithm uses a screening test from one manufacturer, a second confirmatory
test, from another manufacturer, if there is a positive result from the
screening test, meaning that the number of confirmatory tests used is equal to
the positivity rate in the testing venue. A tie-breaker test, from a third
manufacturer, resolves discrepancies between the screen and the confirmatory
test) which change has become effective in the first quarter of
2009. Consequently we expect our sales to Nigeria to decrease
significantly in 2009 as compared to 2008.
Equipment
Purchase Commitment:
In
January of 2009, the Company entered into an agreement with an equipment
manufacturer to design and build equipment that will be used to automate the
assembling of our tests and lower our production costs. The estimated
cost of $323,500 is being paid in installments over a five month
period.
F -
22
CHEMBIO DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND
2007
DPP®
Agreements:
|
a.
|
Brazil:
|
On
January 29, 2008 we signed three new technology transfer, supply and license
agreements with the Bio-Manguinhos unit of the Oswaldo Cruz Foundation of Brazil
(“FIOCRUZ”) for products we have developed or are have nearly completed
development of.
On
October 2, 2008 the Company announced a fourth technology
transfer supply and license agreement with FIOCRUZ for it’s DPP® HIV 1/2 rapid
test (for use with oral fluid or whole blood samples). Based upon the four
agreements we signed with FIOCRUZ in 2008, together with revenues that are
anticipated under the original agreement we signed with FIOCRUZ in 2004 for our
STAT PAK® rapid test, and subject to required regulatory approval and Ministry
of Health funding of the screening programs these tests are designated
for.
|
b.
|
Bio-Rad:
|
On April
16, 2008 we announced a new development agreement with Bio-Rad Laboratories,
N.A. (“Bio-Rad”). The agreement with Bio-Rad is for the development
of a new multiplex product that would be developed on DPP® and which would be
marketed exclusively by Bio-Rad under an exclusive limited DPP® license from
Chembio to Bio-Rad limited to the field of application of this
product. Our agreement with Bio-Rad contemplates that we will enter
into a license agreement no later than December 2008 subject to the satisfaction
of certain development and other conditions. On January 19, 2009
Chembio granted, effective December 31, 2008, a limited exclusive license within
a defined field of application for Chembio’s Dual Path Platform technology to
Bio-Rad Laboratories, Inc. (“Bio-Rad”). The license was granted following
development milestones as set forth in the agreement mentioned above. As part of
this agreement, in 2009,
subsequent to the balance sheet date, Chembio received $340,000 from
Bio-Rad as a license fee.
F - 23
Exhibit
21
List of
Subsidiaries
Chembio Diagnostics Systems,
Inc. (Delaware)
Exhibit
23.1
CONSENT
OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We
hereby consent to the incorporation by reference in Registration Statement No.
333-69460 and Registration Statement No. 333-141555 on Form S-8 of our
report dated March 18, 2009 relating to the consolidated balance sheet of
Chembio Diagnostics Inc. and Subsidiaries as of December 31, 2008 and the
consolidated statement of operations, stockholders’ equity and cash
flow for the year ended December 31, 2008 appearing in this Annual Report on
Form 10-K of Chembio Diagnostics, Inc. for the year ended December 31,
2008.
Parente
Randolph, LLC
/s/ Parente Randolph,
LLC
New York,
New York
March 18,
2009
Exhibit
23.2
CONSENT
OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We
hereby consent to the incorporation by reference in Registration Statement No.
333-69460 and Registration Statement No. 333-141555 on Form S-8 of our
report dated March 7, 2008 relating to the consolidated balance sheet of Chembio
Diagnostics Inc. and Subsidiaries as of December 31, 2007 and the consolidated
statement of operations, stockholders’ equity and cash
flow for the year ended December 31, 2007 appearing in this Annual Report on
Form 10-K of Chembio Diagnostics, Inc. for the year ended December 31,
2008.
Lazar
Levine & Felix LLP
/s/ Lazar Levine & Felix
LLP
New York,
New York
March 18,
2009
EXHIBIT 31.1
CERTIFICATION
I,
Lawrence A. Siebert, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Chembio Diagnostics,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and
have:
|
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c.
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d.
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|
5.
|
The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
Date: March
18, 2009
/s / Lawrence A.
Siebert
Lawrence
A. Siebert
Chief
Executive Officer, President, and Chairman
(Principal
Executive Officer)
EXHIBIT 31.2
CERTIFICATION
I,
Richard J. Larkin, certify that:
|
|
1.
|
I
have reviewed this annual report on Form 10-Kof Chembio Diagnostics,
Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and
have:
|
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
c.
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d.
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|
|
5.
|
The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
Date: March
18, 2009
/s / Richard J.
Larkin
Richard
J. Larkin
Chief
Financial Officer
(Principal
Financial Officer)
EXHIBIT
32
CHEMBIO
DIAGNOSTICS, INC.
SARBANES-OXLEY
ACT SECTION 906 CERTIFICATION
In
connection with this annual report on Form 10-K of Chembio Diagnostics, Inc.
(the “Company”) for the fiscal year ended December 31, 2008, each of the
undersigned, Lawrence A. Siebert, the Chief Executive Officer, President and
Chairman of the Company, and Richard J. Larkin, the Chief Financial Officer of
the Company, hereby certify pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
1.
|
This
Form 10-KSB for the fiscal year ended December 31, 2008 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
|
|
|
2.
|
The
information contained in this Form 10-KSB for the fiscal year ended
December 31, 2008 fairly presents, in all material respects, the financial
condition and results of operations of Chembio Diagnostics, Inc. for the
periods presented therein.
|
Date:
March 18, 2009
/s / Lawrence A.
Siebert
Lawrence
A. Siebert
Chief
Executive Officer, President and Chairman
(Principle
Executive Officer)
/s./ Richard J.
Larkin
Richard
J. Larkin
Chief
Financial Officer
(Principle
Financial Officer)